IBC: Slowing Economic Momentum Calls for Stronger Supply-Side Reforms

Indonesia’s economic momentum is beginning to weaken, with a range of leading indicators pointing to softer household demand, slowing business activity and growing pressure on the country’s external position, according to the Indonesian Business Council (IBC).

While the Government and Bank Indonesia have taken appropriate steps to support economic activity, IBC said the slowdown should also be used as an opportunity to strengthen the foundations of Indonesia’s long-term growth. Consumer demand has continued to moderate. Consumer credit grew by just 5.89% year-on-year in May 2026, well below its average annual growth of around 10–11% since 2009, excluding the COVID-19 period in 2020–2021.

The slowdown has been accompanied by a steady decline in the Consumer Confidence Index. Although the index remains in optimistic territory, it has fallen continuously since November 2025 to 117.8 in June 2026, reflecting weaker household expectations for income, employment opportunities and business conditions.

The production side of the economy is showing similar signs of weakness. Working capital loans expanded by 8.09% year-on-year in May, below their long-term average of around 10–11%. Credit to micro, small and medium-sized enterprises grew by only 0.6%, far below its historical average of around 8–9%. Manufacturing activity also remained under pressure, with Indonesia’s Manufacturing Purchasing Managers’ Index falling to 46.9 in June, well below the 50-point threshold separating expansion from contraction.

Taken together, the indicators suggest that both households and businesses are losing momentum.

The policy response also reflects the changing economic environment. On the fiscal side, the Government introduced a Rp26.34 trillion economic stimulus package for the second half of 2026. Bank Indonesia, meanwhile, kept its policy rate unchanged after previously raising rates by a cumulative 100 basis points to safeguard rupiah stability.

IBC, however, said managing aggregate demand alone would not be sufficient to restore stronger and more sustainable economic growth.

External indicators reinforce this assessment. Indonesia recorded a trade deficit of US$1.61 billion in May, after export growth reached only 0.9% year-on-year in the first quarter of 2026.

These developments point to structural challenges on the production side that are affecting the ability of Indonesian products to compete in international markets. Without appropriate reforms, such challenges could widen the current account deficit over time, place persistent downward pressure on the rupiah and increase Indonesia’s reliance on foreign capital inflows to maintain external stability.

“Indonesia’s economic challenge is no longer simply about supporting demand in the short term,” said Chief Economist IBC Denni Purbasari. “The current slowdown should be used as an opportunity to strengthen the economy’s supply side by improving productivity, efficiency and competitiveness. These are the foundations needed to support stronger investment, higher exports and sustainable job creation.”

Looking ahead, IBC sees the preparation of the 2027 State Budget as an opportunity to allocate a larger share of public expenditure toward investments that expand the economy’s productive capacity.

Priority areas include physical and digital infrastructure, more efficient logistics systems, green energy, education and training in science, technology, engineering and mathematics, as well as greater investment in research and development.

At the same time, IBC emphasized that not every growth-enhancing reform requires additional fiscal spending. In many cases, stronger growth depends less on higher public expenditure than on a shift in development strategy and policy priorities.

Improvements in legal certainty, policy consistency, regulatory quality and the overall business climate can have a significant impact on investment decisions and business expansion without placing substantial additional pressure on the state budget.

IBC therefore welcomed the Government’s commitment to streamline regulations and remove bottlenecks to investment and business operations.

Implemented consistently and guided by internationally recognized principles of regulatory quality, these reforms would strengthen business confidence, improve Indonesia’s competitiveness and support higher, more inclusive and sustainable economic growth.