By Gayatri Suroyo and Stefanno Sulaiman
JAKARTA, Feb 5 (Reuters) - Indonesia reported its best economic expansion in three years in 2025 as growth accelerated more than expected in the fourth quarter on robust household spending and strong investment, official data showed on Thursday.
Southeast Asia's biggest economy grew 5.11% annually in 2025, up from 5.03% a year earlier. It was the highest annual growth rate since 2022, but still below the government's target of 5.2%.
President Prabowo Subianto wants the $1.4 trillion economy to grow by 8% by 2029, but analysts say he faces headwinds, including slowing international trade due to U.S. tariffs and geopolitical tensions, as well as domestic factors like souring investor sentiment.
The government increased its fiscal stimulus in 2025 to prop up demand and vowed to stay on course this year. The central bank cut interest rates by 150 basis points between September 2024 and September 2025 and analysts say more cuts are likely.
In the fourth quarter, the growth rate was 5.39% on a yearly basis, the quickest pace since the third quarter of 2022. Analysts in a Reuters poll expected 5.01%.
Statistics Indonesia chief Amalia Adininggar Widyasanti said a 16.23 trillion rupiah ($965 million) stimulus package in the final quarter helped raise household spending, while investment was another strong growth driver.
FISCAL STIMULUS
The stimulus measures included the distribution of rice to 18.3 million households and the waiving of personal income tax for workers in the tourism sector.
Household spending, which makes up more than half of Indonesia's gross domestic product, grew 5.11% in the October-to-December quarter, the fastest pace in more than two years.
For all of 2025, household spending grew 4.98%, the fastest since 2019, while investment growth of 5.09% was the highest since 2018.
"Domestic demand rebounded in Q4 2025 with the shift in fiscal policy stance following the change in leadership in the Finance Ministry in September 2025," said ANZ economist Krystal Tan, calling the pace "solid."
Pro-growth economist Purbaya Yudhi Sadewa was appointed finance minister in September, replacing the more fiscally conservative Sri Mulyani Indrawati.
But Sri Mulyani's abrupt sacking, a widening budget deficit and the appointment of Prabowo's nephew to the central bank triggered capital outflows, sending the rupiah to a historic low against the U.S. dollar last month.
The government has targeted 5.4% growth in 2026, relying on more spending for Prabowo's flagship programmes and investment by sovereign wealth fund Danantara.
Brian Lee, economist with Maybank, expected only a marginal pickup in 2026.
"The recent market selloff could hit consumer confidence," Lee said, referring to last week's plunge in Jakarta's main equity index triggered by concerns about transparency and liquidity.
Analysts also said Prabowo's crackdown on the resources sector, including the takeover of the Martabe gold mine in disaster-hit North Sumatra, could weigh on investment sentiment.
DATA VERACITY
Some economists questioned the veracity of the GDP data, pointing to declining 2025 tax revenues and other indicators, including flat growth in foreign direct investment.
"One may wonder whether the (household spending) growth rate is still too high, given the sluggish labour market and reports of lower-than-usual tourism activities on top of the low tax collection," said Rizki Siregar, an economist at the University of Indonesia.
Nailul Huda, an economist with the Center of Economic and Law Studies, said there was a discrepancy between data on high net exports in 2025 and strong investment growth coming from the imports of machinery.
Several local think tanks had also questioned the third-quarter GDP data last year, arguing it did not reflect indicators like falling auto sales, a contraction in manufacturing activity and reports of layoffs.
($1 = 16,820.0000 rupiah)
(Reporting by Gayatri Suroyo, Stefanno Sulaiman, Fransiska Nangoy; Editing by David Stanway, Stephen Coates and Thomas Derpinghaus)
