Highlights

• Headline GDP beat is a statistical anomaly, not a sign of stronger growth. Indonesia's 3Q26 GDP grew 5.47% yoy, above consensus and our forecast, but the upside was driven mainly by a narrower net-export contraction, high inventory growth, and a significant rise in statistical discrepancy, not by broad-based domestic demand.
   
• Domestic demand continues to weaken. Household consumption, government spending, and investment all remain on a slowing trend. Household consumption grew 5.04%, supported largely by subsidies and social aid, while labour market conditions worsened. Informal sector employment rose to 57.93% of the workforce and average wages grew only 2.52% yoy, below inflation.
   
• Outlook remains steady but risks are building. We forecast GDP growth of 5.3% in 4Q26 and 5.3%-5.6% in 2027, supported by expansive fiscal policy and commodity-related investment. However, weakening domestic demand, rising external-balance risks, potential MSCI/credit-rating downgrades, and higher inflation are likely to keep pressure on Bank Indonesia to raise rates. We expect at least one 25bp hike to 6.00% by end-26 and another in 1Q27.
   

Analysis

• Indonesia's GDP grew 5.47% yoy in 3Q26, slightly accelerating from 5.29% in 2Q26 and coming in well above both market consensus (5.20%) and our forecast (5.18%). Despite the stronger headline print, we view the result as a statistical anomaly rather than evidence of robust economic growth. The upside surprise was driven mainly by: a) a narrower contraction in net exports due to slower import growth; b) high inventory growth amid weaker domestic purchasing power; and c) a consistent rise in statistical discrepancy.
   

• By contrast, all major domestic demand components – household consumption, investment, and government spending – remain on a slowing trend.
   

• Household consumption grew 5.04%, slower than in the previous quarter, and was supported largely by state subsidies, which rose 28.0% yoy, and social assistance, which grew 8.1% yoy. Labour market indicators also point to further deterioration. The share of workers in the informal sector continued to rise, reaching 57.93% of the total workforce, or approximately 85.73m people. Meanwhile, average wages grew only 2.52% yoy in Aug 26 to Rp3.415mn, below national inflation of 3.19% yoy.
   

• Government consumption grew 8.95% yoy, down from 15.97% in the previous quarter, reflecting slower staff and goods spending amid increasingly limited fiscal space. Investment growth also slowed to 6.06%, weighed down by higher interest rates and weaker private sector confidence, despite government capital-goods spending rising 20.1% yoy.
   

• On the production side, the stronger GDP print was supported by acceleration in several major sectors. Manufacturing grew 5.87% yoy, helped by higher CPO and nickel prices. Mining recorded a slight acceleration to 0.91% yoy, supported by higher mineral prices.
   

• Several sectors also benefitted from government-related activity. Accommodation and food and beverage growth improved, partly due to the Free Nutritious Meals (MBG) programme. Wholesale and retail trade grew 7.14% yoy, driven by government procurement of goods for priority programmes. However, agriculture – a significant contributor to GDP – slowed to 0.46% yoy due to forest fires in Sumatra and Kalimantan.