Indonesia's economy continued its steady expansion in early 2026, supported by domestic demand and government measures that helped counter the economic impact of the Middle East conflict.

Official data released on Tuesday showed that Southeast Asia's largest economy grew 5.61% year-on-year in the first quarter, compared with a 5.39% expansion in the fourth quarter of 2025. The growth rate exceeded the median forecast of 5.35% from a survey of six economists.

On a quarterly basis, Indonesia's economy contracted by 0.77%.

Although official growth rates have remained stable over the past year, analysts expect the spillover effects of the ongoing conflict to weigh on Indonesia's economy in the coming months. Like many other Asian nations, Indonesia faces pressure from supply chain disruptions caused by the conflict, which are driving up energy costs.

So far, fuel subsidies have helped curb inflation, but indicators of factory activity suggest businesses are beginning to feel the pressure from rising prices.

S&P Global's manufacturing Purchasing Managers' Index showed that input cost inflation rose to a four-year high in April due to the conflict, while output saw its largest decline since May 2025. Business confidence also weakened as companies reported delivery delays and material shortages.

Economists at DBS said in a recent report that the first quarter may mark the peak of GDP growth this year. They expect growth momentum to cool as energy prices and fiscal consolidation weigh on economic activity.

Tighter monetary policy could also dampen growth if the oil-sensitive Indonesian rupiah continues to face geopolitical headwinds.

In a recent report, ANZ economist Krystal Tan noted that Bank Indonesia has already strengthened exchange rate support through interventions, but may need to raise interest rates if foreign exchange pressures persist.

During the central bank's last meeting, the governor emphasized that Indonesia's economy requires sustained support to maintain resilience, highlighting the need for both government and monetary measures to boost domestic demand.

ANZ expects Bank Indonesia to implement two 25-basis-point interest rate hikes by the end of this year, with the first increase possibly occurring as early as this quarter.