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Steady growth

Indonesia expanded 5% yoy in 3Q25, flatlining from quarter before (2Q at 5.1%) and in line with expectations. This takes growth in 1Q-3Q25 to 5% yoy, similar to 2024. Deceleration in activity in 3Q was better reflected in the qoq pace, which slowed to 1.4% from 4% in 2Q. A similar easing in trend was observed in the seasonally adjusted momentum (see chart). Along our expectations, there was slight let up in domestic engines in 3Q, while external trade held the fort.

Key takeaways:

• On an aggregate basis, the year-on-year momentum was supported by stimulus measures, a modest pickup in public spending and positive net external trade on the back of frontloaded manufactured and commodity exports.
• In terms of contribution, net exports accounted for ~43% of headline growth, followed by consumption, while destocking weighed.  
• Amongst domestic drivers, consumption expenditure benefited from higher government participation, whilst household demand slowed slightly to 4.9% yoy vs 5% quarter before. Welfare measures led to an improvement in the retail sales index, with higher demand for services also suggesting a differentiated pace of spending amongst various income groups.
• Investment growth displayed a mixed trend, with lower interest in fixed assets (i.e. building & structures) but deployment rose in machinery and equipment. Combining fixed asset investments and inventory, overall gross capital formation (CF) subtracted from the headline print.
• Net exports were one of the key pillars of support for the headline, as goods trade displayed reliance on account of frontloading in offshore demand, while import demand weakened in the quarter consistent with softer business investments and guarded sentiments. This led the trade surplus to widen materially (discussed in detail in the last part of this report).

Outlook

Growth is likely to fare better in 4Q25, as the combined effect of policy transmission after BI’s rate cuts, fast track in government spending, more welfare measures, surplus liquidity and relative resilience in external trade play out. Factoring these drivers, we revise our full year growth forecast to 5% from 4.9% before, while maintaining 2026 at 5%. Nominal GDP is likely to average 7.2-7.4% on a higher deflator and keeping macro ratios in check.

Overall, annual growth has continued to flatline around 5% for better part of the decade (barring Covid years). The administration’s plans to durably lift growth towards 6% and thereafter 8% would require tough reforms and a shift in the growth orientation towards manufacturing investments, besides boosting human capital to utilise the demographic dividends. Household spending will require support by way of better real incomes as well as sufficient employment generation.

Uptick in inflation unlikely to derail policy doves

October inflation quickened by the fastest pace in over year and a half at 2.9% yoy vs 3Q average at 2.4%, with core also up 2.4% vs 3Q’s 2.2%. Besides a modest rise in select food categories, much of the sequential increase was on account of personal care category i.e., primarily gold jewellery, and higher college tuition. Other segments like cigarettes and airfare prices also rose on the month. Inflation is expected to stay within the BI’s target of 1.5-3.5% in 2025 and 2026. Two-way forces have been at work, with stimulus measures imparting a disinflationary impulse, whilst food, gold and services (education, airfares etc.) limit downside. We revise down our 2025 inflation forecast to 2.0% (average) from 2.2% previously and expect base effects to partly lift 2026 inflation to 2.5%.

For the year, given the narrow set of drivers behind the rise in inflation, we don’t expect the BI to change its stance, keeping the door open for further rate reductions. That said, we see a more than even chance that the central bank might lean towards a pause in November due to a weaker currency (to prevent further narrowing in rate differentials vs the US), whilst pushing for faster policy transmission. Expectations for a December rate cut by the US Fed have also been tempered after relatively hawkish remarks by the FOMC chair last month. BI expects two rate cuts from the US Fed by 1Q26 in its baseline view.

In the interim, the central bank is likely to encourage faster policy transmission and undertake macroprudential measures to lower the effective lending rate. Deputy Governor Aida S. Budiman had remarked that despite 150bp cuts by the BI since second half of 2024, banks had only lowered loan rates by 15bp, while markets-based rates, i.e. interbank rates (IndoNIA is down ~230bp vs Aug24) and 6-month SRBI yields (-240bp since Aug24), had fallen more notably.

In a bid to lower the effective borrowing cost for priority sectors, the revised Macroprudential Liquidity Incentive (KLM) scheme for priority sectors will see banks receive up to 5.5% of third-party funds (DPK) as liquidity incentives (up from 5% previously) - 5% through the lending channel and 0.5% through the interest rate channel. Targeted sectors include agriculture, industry, downstreaming, services including the creative economy, construction, real estate and housing, as well as micro, small, and medium enterprises, cooperatives, inclusion, and sustainability.

Goods trade surplus to keep current account gap in check

September exports rose 11.4% yoy, firmer than 5.8% in August, defying expectations of a passage in frontloading of shipments in midst of higher tariffs. Exports to the US and China stayed firm in the month, led by commodities, including palm oils (18% vs 51% in Aug), mineral fuels, iron & steel, nickel products (19.8% yoy) and precious metals/ gems. By contrast, coal shipments continued to decline. In first 9M25, China (iron & steel, nickel, and minerals), US (machinery, electrical equipment, textiles) and India were the three main export destinations, making up ~41% of total shipments. US lowered the reciprocal tariff rate on Indonesia to 19%, in line with regional peers, besides successfully concluding a bilateral trade deal. In a potential boost for exports, authorities are in discussions with the US to gain exemptions on key commodities, including palm oil, rubber and cocoa, besides medical supply chain goods and few strategic industries, along the lines of a recent agreement with Malaysia. 

At the other end of the equation, Sep imports rebounded sharply, up 7.2% yoy vs -6.6% in Aug, which led the trade surplus to narrow to $4.3bn vs $5.5bn. Pick up was broad based, led by capital goods (28% yoy vs 2.5% in Aug), accompanied by consumer as well as intermediate goods, taken as an indication of a pickup in domestic demand.

Indonesia’s 2025 goods trade surplus in on course to be wider than 2024, providing a key tailwind to the current account math. We remain sanguine on the CAD outlook with full year deficit likely to be narrow at -0.2% of GDP this year vs -0.6% in 2024, with BOP in a modest surplus, aided by steady FDI flows while portfolio interests remain volatile.  

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