Economic outlook 2026: navigating global fragmentation, domestic adjustment, and climate risks

Macroeconomics and Climate Outlook
Global growth is projected to moderate to around 3.3 percent in both 2025 and 2026, as economies adjust to weaker trade momentum, and heightened policy uncertainty, despite a surge in investment in high-technology sectors, including artificial intelligence. Advanced economies are expected to expand modestly in 2026, with growth in the United States at around 2.4 percent, the euro area near 1.3 percent, and Japan below 1 percent. Emerging markets remain the primary source of global growth, led by India
and several ASEAN economies. In Islamic (OIC) countries, growth prospects are uneven: hydrocarbon exporters benefit from energy revenues and fiscal buffers, while non-oil economies face constraints from tighter financing conditions, external vulnerabilities, and structural bottlenecks. Inflation has continued to ease globally, reaching approximately 2.9 percent in 2025, but remains elevated in parts of the Islamic world due to food price pressures, exchange rate pass-through, and subsidy reforms.
Risks to the outlook are tilted to the downside. Rising trade protectionism, including higher U.S. tariffs, is increasing uncertainty and weighing on global trade growth in 2026. Geopolitical tensions, especially following recent US intervention in Venezuela, climate-related shocks, and high debt levels further constrain growth, particularly in fiscally constrained Islamic economies with limited monetary policy space. While some OIC countries are advancing diversification, green investment, and Islamic finance instruments to strengthen resilience, subdued global demand and tightening financial conditions limit near-term upside. Overall, the global and Islamic-country outlook for 2025–2026 is characterized by moderate growth, uneven disinflation, and elevated exposure to trade, financial, and climate risks.
Indonesia’s economy has maintained steady but moderating growth, accompanied by increasing fiscal caution as the deficit has reached its highest level in the past two decades, excluding the pandemic period, and is approaching the statutory cap of 3 percent of GDP. Economic growth is projected at around 5 percent in 2025, supported primarily by resilient household consumption and contained inflation. Headline inflation has remained within Bank Indonesia’s target range, enabling a gradual shift toward monetary easing, with the policy rate reduced to 4.75 percent and some additional cuts expected in 2026. External balances have benefited from trade diversion and downstream manufacturing, although export performance has become increasingly concentrated and commodity-related revenues have softened. Investment has shown early signs of recovery but remains constrained by subdued demand, regulatory uncertainty, and borrowing costs that remain elevated relative to previous growth cycles.

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