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Indonesia—Trade tensions will exacerbate domestic demand slowdown
Indonesia’s economy is slowing; GDP growth of 4.87% y/y in Q1 2025 was the lowest since 2021. Growth in household spending—the powerhouse of Southeast Asia’s largest economy—moderated, despite the Eid al-Fitr holiday typically being a boon for travel and consumer spending. Government spending also contracted following an election-related boost in 2024. Austerity measures worth US$19 billion were announced in February—including a 70% reduction in funding for the public-works ministry, which oversees infrastructure—to sustain spending on signature programs like the free school meal initiative. Mining output also shrank amid lower global commodity prices and investment growth decelerated sharply amid domestic and global policy uncertainty and exchange rate volatility. The rupiah reached a record low in April, but it has since strengthened (Chart). Pressure on the rupiah worsens financial risks and limits the ability of Bank Indonesia to stimulate growth via lower interest rates. That said, comfortable foreign exchange reserves provide a buffer to excessive volatility.
In contrast, robust exports (+6.8% year-on-year in Q1, compared to +1.5% in Q1 last year) cushioned the economy as orders were front-loaded in anticipation of higher tariffs. Despite a continued tourism rebound, export resilience is unlikely to last. Finance Minister Sri Mulyani estimates that now-delayed US reciprocal tariffs of 32% on Indonesian exports could cut potential growth by 0.3 to 0.5 ppts. The US was Indonesia’s second largest export destination last year and global trade tensions do not bode well for key commodity exports. Overall, the IMF forecasts GDP growth to decelerate to 4.7% this year and next, below the aspirational 8.0% target set by the Prabowo government and the rate needed to achieve the goal of high-income status by 2045. Indonesia is Australia’s 10th largest export market (US$16 billion in 2024) with a commitment to deepen bilateral and regional trade and investment ties.
