Indonesia’s economy has posted its slowest quarterly growth since the third quarter (Q3) of 2021, raising red flags over the nation’s recovery momentum and prompting calls for urgent fiscal and monetary interventions. 

Center of Economic and Law Studies (Celios) researcher, Galau D. Muhammad, said the country’s first quarter (Q1) 2025 performance reflects a concerning stagnation, with GDP shrinking 0.98 percent quarter-on-quarter, the steepest decline in the past five years.

Despite the return to post-pandemic normalcy, Galau notes that economic activity remains below expected trajectories.

“This slowdown is not just a statistical drop. It signals structural weaknesses, especially in household consumption and investment,” he said in an interview with Indonesia Business Post, on Tuesday, May 6, 2025.

Household spending, typically a strong pillar of the Indonesian economy, grew only 4.89 percent year-on-year, a marginal drop from 4.91 percent in Q1 2024, despite the stimulus effect of the Ramadan season.

Meanwhile, gross fixed capital formation (PMTB) recorded a subdued 2.12 percent growth, further dampening prospects for sustainable expansion.

“Consumption and investment together account for over 80 percent of Indonesia’s GDP. When both slow down, the entire economy takes a hit,” Galau cited.

He added that fiscal tightening, driven by a 30.1 percent drop in state revenue, significantly weakened government spending capacity, with public expenditure contracting 1.38 percent year-on-year.

While acknowledging global headwinds − including trade wars and geopolitical tension, Galau asserted that domestic factors remain the primary drag.

“Cuts in public spending are being felt directly at the local level, hurting real economic activities,” he said.

The impact has also rippled through the labor market. “Mass layoffs in manufacturing and textiles are shrinking the formal workforce, pushing more Indonesians into insecure and unprotected employment,” Galau warned.

“We’re seeing a troubling decline in household savings, particularly among the middle class.”

The economist cautioned that if the current trend persists, Indonesia could face a technical recession. He emphasized the vulnerability of key sectors such as manufacturing, which faces falling demand for raw materials, reduced production efficiency, and lower workforce absorption.

To address the crisis, Galau urged the government to adopt a more aggressive fiscal stance.

“The priority must be on restoring purchasing power through expanded social safety nets targeting vulnerable and middle-income groups,” he said.

On the monetary front, he criticized the Indonesian Central Bank’s (BI) increasing burden from political mandates, particularly its rising share of government bond holdings.

“There must be a credible reassessment of BI’s role as the last-resort buyer of sovereign debt. The market needs room for private bonds to grow,” Galau added, while suggesting that lower yields on state bonds would enable industries to tap into domestic investment more effectively.

Still, Galau sees potential for recovery in labor-intensive sectors. Agriculture, which employs 28.54 percent of the workforce, remains critical, alongside trade (19.26percent), manufacturing (13.45 percent), food services (7.87 percent), and construction (5.97 percent).

“These sectors are lifelines for employment. Protecting their growth is non-negotiable if we want to avert further economic distress,” he concluded.