Indonesia's first-quarter economic growth is fastest in over three years

JAKARTA - Indonesia's economy grew at its fastest annual pace in more than three years at the start of 2026, boosted by a surge in government spending and holiday celebrations, but analysts warned the Middle East conflict could threaten growth.

GDP grew 5.61 per cent in the January-March quarter from a year earlier, Statistics Indonesia said on Tuesday (May 5), stronger than the 5.30 per cent expected by analysts in a Reuters poll and the fourth- quarter figure of 5.39 per cent in 2025.

It was the fastest growth rate since the third quarter of 2022, fuelled by a surge of 21.8 per cent in government spending that included holiday bonuses for civil servants and spending for President Prabowo Subianto's free-meal programme in schools.

"The first quarter likely marked the peak, with the momentum set to moderate in subsequent quarters as real activity could be dampened by high energy prices and pressure to consolidate fiscal finances," said DBS Bank analyst Radhika Rao.

Growth in household spending, which contributes more than half of Indonesia's GDP, rose by an annual 5.52 per cent in the quarter, helped by the Muslim holy month of Ramadan.

Spending, including categories such as travel, normally rises during the festivities, which started in mid-February this year.

Investment expanded by 5.96 per cent, slightly slower than the previous quarter's growth of 6.12 per cent.

Most business sectors expanded in the first quarter, except for mining and utilities.

"We already saw signs of caution in household consumption from the March retail sales and consumer confidence data," said Maybank economist Brian Lee.

"With inflation expected to climb in the months ahead and the onset of economic headwinds from the Gulf war, household consumption growth will likely cool," he said, adding that the government may also be forced to cut costs to balance fuel subsidies, for example.

'Growth to continue'

However, Finance Minister Purbaya Yudhi Sadewa said he expected the economy would continue to grow faster, spurred by incentives being prepared for sectors such as electric vehicles and textiles.

Industries such as textiles and footwear would receive soft loans to renew machinery, he added.

Purbaya acknowledged challenges, including external shocks from the Iran war, but said Indonesia's economy had yet to be affected in the way other countries were, pointing to a widening trade surplus in March.

Prabowo took office in late 2024 pledging to lift growth to 8 per cent during his term from the 5 per cent where it had hovered since the Covid-19 pandemic.

But he faces challenges such as budget pressures and spillover from the Iran war, which has boosted energy prices and weakened the rupiah, which slid on Tuesday to a historic low of 17,445 a dollar as global sentiment worsens.

The government targets GDP growth of 5.4 per cent in 2026, while Bank Indonesia forecast growth of 4.9 per cent to 5.7 per cent for the year.

Analysts said the central bank's room for policy easing is shrinking and some economists expect it to hike rates if pressure on the rupiah grows. The central bank held interest rates steady at its April review.

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