Economic Update Indonesia: Indonesian Economy Expands at a Rate of 4.87% (Y/Y) in Q1-2025

On Monday (5 May 2025), Indonesia’s Statistical Office (Badan Pusat Statistik, BPS) released the official gross domestic product (GDP) data of Indonesia.

The Q1-2025 GDP growth rate of Indonesia was recorded at 4.87 percent (y/y). For the Indonesian government this might also function as a wake-up call as it still holds an economic growth target of 5.2 percent (y/y) for full-year 2025.

What is even more worrying is that the real external shock might still need to come, considering steep US import tariffs could cause quite some chaos once imposed in a few months’ time (while a 10 percent baseline tariff was already imposed by Donald Trump at the start of the second quarter of 2025). However, it is true that Indonesia is less trade-dependent on the United States compared to some of its regional peers, potentially mitigating the direct impact of these tariffs.

External Environment

Overall, the external environment remains highly uncertain. The Russo-Ukrainian and Israel-Hamas wars are still ongoing (and there is always the risk of escalation), undermining the flow in supply chains and causing energy price volatility.

Meanwhile, escalating trade tensions between the United States and China have a negative impact on both countries’ economic growth. In Q1-2025, economic growth of the US contracted by 0.3 percent (y/y). And while China’s growth rate was better-than-expected in Q1-2025 at 5.4 percent (y/y), the economy of China remains quite shaky, and only seems to be a shadow of what it once was in the 2000s. Considering the economies of the United States (US) and China are the biggest engines of global economic growth, any hiccups in these economies will be felt across the globe.

Moreover, central banks struggle to cut benchmark interest rates. As the US Federal Reserve is still facing higher-than-targeted inflation, its target range for the Federal Funds Rate is currently at 4.25–4.50 percent (y/y). This is a relatively high position. After all, in the period between the 2007-2008 Financial Crisis and recovery from the COVID-19 crisis, societies had become used to historically low US interest rates, for an extended period, often near zero, to stimulate economic recovery.

The trouble is that Indonesia’s central bank (Bank Indonesia) cannot cut its interest rate when the US Federal Reserve is hawkish. If the gap between rates becomes too wide (when Indonesia offers too little to investors), then capital will simply move from Indonesia’s markets to the US, thus putting pressure on the rupiah rate, foreign exchange reserves, stocks listed on the Indonesia Stock Exchange, and the current account balance. In January 2025, Bank Indonesia cut its key interest rate by 0.25 percent to 5.75, and has left it at that level ever since (amid heavy pressures on the rupiah rate against the US dollar and Euro stemming from trade war fears).

Another negative (external) matter is that global commodity prices have generally been sliding in the past couple of quarters. Coal prices were much lower in Q1-2025 than in Q1-2024 or Q4-2024. Palm oil prices, too, were down in Q1-2025 (from Q4-2024). Considering Indonesia’s export performance is to a large extend dependent on coal and palm oil, it does not constitute a positive omen for Indonesian exports.

Therefore, the external environment is currently not ‘too supportive’ of Indonesia’s economic growth. Fortunately, Indonesia can count on its huge internal market with a population that numbers around 285 million people. The population is a consumer force that attracts domestic and foreign direct investment. And therefore, household consumption and gross fixed capital formation are typically the key contributors to Indonesian GDP. The question is, though, to what extent did international turmoil do damage to this internal market? In this article we zoom in on all GDP components of Indonesia in order to give a comprehensive view of the performance of the country’s national economy in Q1-2025.

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