Regional economic growth in 2025 is projected to strengthen, primarily underpinned by western regions, despite global uncertainty. Regional economic growth in Java and Sumatera strengthened against a backdrop of restrained economic growth in eastern regions of the archipelago. Economic gains in Java and Sumatera were driven by external performance given the frontloading of exports bound for the US caused by the trade war, coupled with stronger demand for gold. Exports from downstream mineral industries in Sulampua, Kalimantan and Balinusra regions also remained solid, despite a lack of local improvement due to limited domestic demand. Investment in Java increased on the back of manufacturing industry projects. Regional fiscal support in 2025 was limited due to spending reallocation and efficiency policy to support priority programs, accompanied by normalisation after the general election contested in 2024. Restrained domestic demand undermined the performance of accommodation and food service activities and spurred trade moderation, particularly in the Java region. Nevertheless, positive regional economic performance in 2025 provided a solid base for stronger growth in 2026.
Regional economic performance is forecast to improve in 2026 relative to 2025 in all regions, boosted by stronger domestic demand. Private consumption in 2026 is also projected to improve in line with economic expectations, government programs and the prospect of a more conducive investment. Private investment in the manufacturing industry as well as the oil and gas sector is expected to precipitate gains in Java and Sumatera, while investment in downstream minerals will stimulate improvements in Sulampua and Kalimantan. External performance is expected to continue improving, particularly in eastern regions, given the resolution of production constraints and increasing demand for coal. Notwithstanding, the role of regional fiscal support geared towards driving the local economy will subside in 2026 given more limited fiscal space due to smaller Transfer Fund Allocations to Regions (TKD). Stronger domestic demand will boost accommodation and food service activities, particularly in Java and Sumatera, as well as domestic-oriented industries in Java. Meanwhile, mining sector growth is forecast to accelerate given the resolution of production constraints in the Sulampua and Balinusra regions. On the other hand, agricultural sector growth is expected to normalise after periods of high growth during 2025 in most regions.
CPI inflation remained under control in 2025, despite rising in all regions. Inflation in most regions was recorded within the 2.5%±1% target corridor, underpinned by policy consistency by Bank Indonesia as well as strong policy synergy with the government and regional governments. Rising inflation was primarily attributable to pressures on international commodity prices, which edged up core inflation, as well as supply disruptions affecting food crops, particularly horticultural and fish products, which elevated volatile food (VF) inflation. On the other hand, the impact of administered prices (AP) inflation was limited in 2025. Higher VF inflation was also caused by the impact of flooding towards the end of 2025, which affected several provinces, particularly in the Sumatera region. At the provincial level, the highest annual inflation was observed in Aceh (6.71% yoy), West Sumatera (5.15% yoy) and Riau (4.88% yoy). The main contributors to high inflation in those three provinces were rice and horticultural crops (red chilies and shallots), primarily due to supply disruptions caused by natural disasters.
CPI inflation in 2026 is forecast to remain under control and within the 2.5%±1% target range. Core inflationary pressures are expected to remain mild in line with anchored inflation expectations, supported by monetary policy consistency, economic capacity below potential, the managed impact of imported inflation as well as the positive impact of digitalisation. VF inflation is projected to fall yet will continue to demand vigilance given the forecast of high rainfall through to the beginning of 2026. Moving forward, synergy through the Central and Regional Government Inflation Control Teams (TPIP and TPID) and implementation of the national food security program must be strengthened to maintain VF inflation below 5%. Meanwhile, AP inflationary pressures are expected to remain under control as the Government has not announced plans to raise tariffs, coupled with various ongoing policies to strengthen public purchasing power.
Moving forward, various global risks must be monitored to mitigate potential spillovers on the domestic economy. Global uncertainty will persist, primarily due to the knock-on effect of US reciprocal tariffs, escalating geopolitical tensions that exacerbate financial market fragilities, as well as disruptions in global supply chains. Policy synergy to maintain economic resilience and accelerate growth must be strengthened. Specifically, this issue is explored in Part IV Strategic Issue: Policy Synergy in Fostering Growth and Maintaining Stability.
