Faisal Maliki Baskoro, Jakarta – Indonesia's economy has remained resilient despite rising global uncertainty, but persistent weaknesses in job quality and household purchasing power threaten the durability of growth, the World Bank said in its latest Indonesia Economic Prospects report released on Tuesday.
Real gross domestic product expanded 5% year-on-year through the first three quarters of 2025, matching recent years and outperforming the average for middle-income countries. Growth was driven by investment and exports, with a temporary boost from front-loaded global trade and strong demand for commodities such as palm oil, iron, steel and gold, according to the report.
"Against a very uncertain global backdrop, Indonesia's economy has held up well," said Carolyn Turk, the World Bank's director for Indonesia and Timor-Leste, at the report's launch. "Macroeconomic stability remains one of Indonesia's key strengths."
Globally, the outlook has been clouded by elevated geopolitical tensions, rising trade barriers and policy uncertainty. While countries have so far adapted through stockpiling, supply-chain adjustments and easier financing conditions, Turk said global growth is expected to moderate as tariffs become a more permanent feature of the trading environment and are increasingly passed on to consumers.
In East Asia and the Pacific, economic activity remains supported by trade, tourism and consumption, but the World Bank warned that tighter external conditions and limited domestic structural reforms could weigh on job creation, particularly as automation, digitalization and artificial intelligence reshape labor markets.
In Indonesia, growth has been relatively broad-based. Services remained the largest contributor, supported by fiscal stimulus, while agriculture rebounded sharply on favorable weather and government programs. Inflation has picked up due to higher food prices but remains within Bank Indonesia's target range. Fiscal and financial buffers are still considered adequate, with the budget operating within statutory deficit limits.
Yet beneath the solid headline numbers, labor market dynamics are weakening household welfare. Employment increased by 1.3% between August 2024 and August 2025, but the gains were concentrated in lower-paying sectors such as low-value services and agriculture. Real wages have been trending down since 2018, and the structure of employment is becoming increasingly polarized, with middle-skilled jobs shrinking relative to both low- and high-skilled roles.
"These patterns are weighing on household consumption," Turk said, adding that private consumption's contribution to growth eased to 2.7 percentage points in 2025 from 2.8 points a year earlier. Youth workers have been disproportionately absorbed into informal and low-tier jobs, reinforcing a sense of economic insecurity even as monetary poverty continues to decline.
Government policy has sought to cushion the impact through targeted stimulus while maintaining fiscal prudence. The fiscal deficit widened to 2% of GDP by October, from 1.4% a year earlier, reflecting weaker revenues amid softer commodity prices, accelerated tax refunds and state-owned enterprise dividends retained by the sovereign investment vehicle Danantara. Quarterly stimulus packages totaling about 0.5% of GDP were rolled out to support consumption and employment, enabled in part by spending efficiencies and underspending in some priority programs.
Monetary policy has also turned more accommodative. Bank Indonesia has cut its benchmark rate by a cumulative 150 basis points since September 2024 to 4.75%, and introduced macroprudential incentives to spur lending. However, credit growth slowed to 7.4% year-on-year in October, pointing to uneven policy transmission, cautious bank risk appetite and a shortage of bankable projects.
Looking ahead, the World Bank projects growth to remain at 5% in 2026 before edging up to 5.2% in 2027, supported by state-led investment, monetary easing and foreign direct investment. Risks are broadly balanced, with potential headwinds from weaker real wages, renewed global trade tensions and volatile capital flows.
To strengthen the foundations for more inclusive growth, the report calls for deeper structural reforms, with a focus on upgrading Indonesia's digital infrastructure. Expanding fast, affordable broadband, strengthening data center and cloud capacity, and improving the regulatory framework could lift productivity and enable the private sector to create better-paying jobs, particularly for young people and women in underserved regions.
"Building strong digital foundations is critical to unlocking faster productivity growth and broadening economic opportunities," Turk said. "It's a pivotal moment to pair Indonesia's macro stability with reforms that raise job quality and long-term growth potential."
Source: https://jakartaglobe.id/business/indonesias-5-growth-masks-job-strains-world-bank-say