World Bank Forecasts Indonesia's Economy to Slow to 5 Percent by 2026
JAKARTA - The World Bank (World Bank) projects that Indonesia's economic growth will slow to 5.0 percent in 2026 due to external pressures affecting national investment and exports.
However, Indonesia's economy is expected to strengthen again in the 2027-2028 period with growth reaching 5.2 percent, driven by improving global conditions and the government's success in implementing structural reforms.
In the June 2026 edition of the Indonesia Economic Prospects report, the World Bank said that economic performance in the first quarter exceeded expectations and the acceleration of government spending at the beginning of the year was the main factor supporting the 2026 growth projection.
Meanwhile, household consumption is estimated to continue to grow by around 5 percent throughout 2026 thanks to the support of various government fiscal stimulus, and government consumption is predicted to increase quite high to 8.7 percent.
Although it is a support for short-term growth, the World Bank warns that dependence on government spending also has its own risks.
"The dependence on public consumption as a buffer for short-term growth is also accompanied by risks, given the limited fiscal space and the increasing burden of subsidies in the midst of the prevailing fiscal regulations," the World Bank wrote in its report, Thursday, June 11.
The World Bank also estimates that conflicts in the Middle East will continue until 2026 even though they remain under control.
The situation is considered potentially disruptive to global oil supplies and global logistics chains, so as a result, the Brent crude oil price is projected to remain at the level of 94 US dollars per barrel, or about 24 US dollars higher than the oil price assumption in the 2026 State Budget.
In addition, global financial conditions are expected to remain tight with high bond yields and risk premiums that can increase at any time if there is new turmoil in the international financial market.
On the other hand, global demand is projected to weaken in 2026 before gradually recovering in 2027 to 2028.
The World Bank assesses that the prospects for Indonesia's economic growth in the medium term are determined by the success of the implementation of structural reforms.
The medium-term economic recovery is expected to be supported by an improving commodity market, stronger private credit growth, accelerated investment through Danantara, as well as deregulation and the removal of business barriers being implemented by the government.
However, the World Bank emphasized that Indonesia's current economic growth is still largely supported by demand-side stimulus, such as government spending and various fiscal programs.
In addition, without reforms that can increase productivity, the impetus is considered to only have a temporary effect and is not enough to strengthen the capacity for sustainable economic growth.
"The achievement of the projected economic growth recovery of 5.2 percent in 2027-2028 will depend heavily on reforms," he said.
In terms of inflation, the World Bank estimates that inflation is still within the Bank Indonesia target, however, the risk of rising food and energy prices still needs to be watched.
The largest risk for Indonesia's economic outlook is still from external factors, namely the prolonged disruption of oil supply and global shipping routes that can increase inflation, increase energy subsidy burden, suppress exports, reduce foreign direct investment (FDI), and increase government borrowing costs as well as the business sector, thus suppressing the rupiah exchange rate and narrowing the fiscal space.
In this scenario, Indonesia's economic growth in 2027-2028 is estimated to be lower by around 0.2 to 0.3 percentage points compared to the baseline projection.
At the domestic level, inadequate implementation of structural reforms will increase labor market vulnerability, hinder the creation of jobs for the middle class, and add pressure on household consumption.
Conversely, higher economic growth opportunities can occur if global oil supplies recover faster, energy prices decline, investor sentiment improves, and the implementation of trade agreements and deregulation reforms progresses faster than expected.
In this positive scenario, lower oil prices, improved trade balances, and investor confidence recovery have the potential to increase GDP growth by 0.2-0.4 percentage points in 2026.
Meanwhile, additional driving factors include a surge in commodity prices, acceleration in the implementation of newly agreed trade agreements, and the sustainability of deregulation reforms.