Economy
Indonesian economy tops estimates to grow 5.6% in Q1
Indonesia’s economy grew 5.6% on an annual basis in the first quarter of 2026, the national statistics agency said Tuesday, exceeding the government’s own forecast despite pressures of the Middle East war.
The reading surpassed the 5.4% recorded in the final three months of 2025, Statistics Indonesia (BPS) head Amalia Adininggar Widyasanti told reporters in Jakarta.
Household expenditure was the biggest contributor to the growth, Amalia added.
The government of President Prabowo Subianto is aiming to raise the Southeast Asian economy’s growth rate from 5.1% last year to 8% by 2029, powered by high public spending.
Amalia said government expenditure grew more than 21% in the first quarter compared to a year earlier.
Last month, Economy Minister Airlangga Hartarto said Indonesia could outlast the impacts of Middle East war-fuelled oil price hikes for up to 10 months without cutting fuel subsidies.
Indonesia is an oil producer but a net importer, and heavily subsidises fuel consumed domestically.
Between a fifth and a quarter of its oil came from the Middle East, but Jakarta has since made an oil deal with Russia and is looking at other alternatives in Africa, the United States and Venezuela.
Every dollar increase in the global oil price adds a burden of about 6.8 billion rupiah (around $400 million) to the state budget.
Jakarta’s 2026 fuel subsidy calculation had been premised on a global oil price of $70 per barrel, which was pushed past $100 a barrel by the U.S.-Israeli war on Iran and Tehran’s response.
The subsidy was also based on an exchange rate of 16,500 rupiah to the dollar, but the currency has since slipped beyond the 17,400 rupiah mark.
Jakarta’s insistence on maintaining the fuel subsidy was feeding fears the government may decide to exceed its 3.0% fiscal deficit ceiling, said Leather, further undermining confidence in the rupiah.
The central bank said Tuesday it would “continue to be present in the market… to maintain the stability of the rupiah’s exchange rate in line with its fundamental value.”
On Monday, BPS said year-over-year inflation for April came in at 2.42%, the lowest so far this year.
The World Bank last month lowered Indonesia’s 2026 growth projection to 4.7% from the 4.8% it had forecast last October.
EU Energy Commissioner Dan Jorgensen warned on Tuesday of the rising energy costs for the bloc triggered by the war in Iran and the subsequent blockade of the Strait of Hormuz.
“Since the outbreak of the conflict in the Middle East, the European Union member states have already spent over 30 billion euros (more than $35 billion) more on fossil fuel imports without receiving any additional supply,” Jorgensen told journalists in Brussels on Tuesday.
“The world is facing what is arguably the most severe energy crisis ever, one that is testing the resilience of our economies, our societies, and our partnerships,” he said.
Roughly a fifth of the world’s traded oil and liquefied gas normally passes through the Strait of Hormuz.
Since the start of U.S.-Israeli attacks on Iran, Tehran has effectively halted shipping through the chokepoint through threats and attacks, while Washington has imposed a naval blockade on vessels entering or leaving Iranian ports.
In addition, energy production facilities in several Gulf countries have been damaged by Iranian strikes in the past months.
European Commission President Ursula von der Leyen recently said the conflict and the Hormuz closure is costing the EU almost 500 million euros a day, raising prices at the pumps and fears of a jet fuel shortage within weeks.
Jorgensen warned of the long-term consequences of the damage, saying gas production in the region “will take probably even years to remedy” while oil production is expected to recover quicker.
The EU commissioner said that the bloc was preparing for potential fuel supply issues. “We are not there yet, but it can happen, especially on jet fuel,” he said.
The European Commission is expected to present guidelines to airlines later this week.
The European Union is “prepared for every scenario” after U.S. President Donald Trump threatened to hike levies on cars coming from the bloc, its chief said on Tuesday.
Trump vowed Friday to raise tariffs on EU cars and trucks from 15% to 25%, accusing the bloc of reneging on a trade accord struck last year – a charge European Commission President Ursula von der Leyen rejected.
“A deal is a deal, and we have a deal,” von der Leyen told reporters in Yerevan, adding: “We are both implementing this deal while respecting the different democratic procedures we have on both sides.”
The European Parliament has given conditional approval to the EU-U.S. trade pact, but under the bloc’s procedures, a final version still needs to be negotiated with member states.
“On the European Union side, we are now in the final stages of implementing the remaining tariff commitments,” said von der Leyen, whose commission leads trade policy for the 27-nation EU.
“At the same time, the U.S. has the commitment – for example, where alignment with the agreed ceiling is still outstanding,” von der Leyen noted.
“So we want from this work mutual gain, cooperation and reliability – and we are prepared for every scenario,” she added.
The trade deal last year capped U.S. tariffs at 15% on most European goods, including cars – lower than the 25% Trump imposed on vehicles from many other trading partners.
The EU’s trade chief Maros Sefcovic is to hold talks with his U.S. counterpart, Trade Representative Jamieson Greer, on the margins of a G-7 ministerial meeting in Paris on Tuesday.
Greer told CNBC on Monday that the approval process on the EU side had been “very slow” and had introduced amendments that would “limit the deal.”
“After discussing this with our European colleagues over many, many months, the president decided that if the Europeans aren’t implementing the deal right now, then we don’t have to implement all of it either at this time,” Greer added.
The European Commission has insisted it remains committed to the accord.
“Since day one, we are implementing the joint statement, and we’re fully committed to delivering on our shared commitments,” EU spokesperson Thomas Regnier said Monday.
The EU has warned it is keeping its options open, but Regnier refused to speculate on how the EU would act if the new tariffs kick in.
Israel is being pushed toward a dangerous debt path as the cost of its multi-front attacks and rising defense demands place heavy pressure on public finances, a report said Tuesday.
Prime Minister Benjamin Netanyahu’s government is struggling to contain defense spending after Oct. 7, 2023, amid a proposed $95 billion defense plan, while ongoing military operations are raising concerns about higher debt and weakened fiscal stability.
That’s according to an analysis by Calcalist, cited by Israeli Ynetnews, the English-language news outlet of the Yedioth Ahronoth media group.
Israel’s economy has been dented by its genocidal war on Gaza and attacks on Iran and Lebanon.
The report said Netanyahu’s classified “Doctrine and Policy Guidelines for 2025-2026,” prepared in late 2025, reshaped the country’s security strategy by instructing the military to prepare for multiple arenas and scenarios.
The document effectively amounted to an open-ended procurement list, with Netanyahu reportedly approving every military demand, according to the analysis.
Defense officials estimated that the broadest interpretation of the policy sought by Netanyahu would cost about 800 billion shekels ($271 billion).
Two alternative plans were later presented to Netanyahu, one costing $152.6 billion and another $84.8 billion.
Following negotiations between the finance and defense ministries, a compromise was reached for $94.5 billion over a span of 10 years, the report said.
Part of the plan, including the purchase of two new air force squadrons, was approved Sunday by the ministerial procurement committee.
‘Dramatic’ implications
The report warned that the economic implications of the plan are “dramatic,” noting that Bank of Israel Governor Amir Yaron has already said the country is on a rising debt path.
With the $118.7 billion plan and efforts to reduce dependence on U.S. aid, Israel’s debt-to-GDP ratio is expected to reach 83% by 2035, according to the report.
The projection is also based on the assumption that the war ends soon, an assumption the report said should be treated with skepticism, given that similar expectations have persisted since early 2024.
It warned that a prolonged conflict would carry far more severe consequences for living standards, including physical and psychological casualties, the cost of reserve duty days, and broader damage to the economy and public finances.
The Finance Ministry and Defense Ministry have also been locked in a budget dispute, with the latter demanding an additional 30 billion shekels for 2026, unrelated to the war, the report said.
The two ministries had agreed in December 2025 on a defense budget of $37.6 billion, plus an additional $1.3 billion to be transferred later, while the defense ministry had sought nearly $48.85 billion.
Following the war, the budget was revisited and another $10.8 billion was allocated for conflict needs, alongside a $2.3 billion reserve still awaiting a decision, according to the report.
Australia’s central bank hiked interest rates for a third time this year on Tuesday, returning borrowing costs to post-pandemic highs and warning of sticky inflation as the conflict in the Middle East led to a global oil shock.
Governor Michele Bullock said the board now judged monetary policy to be slightly restrictive after a burst of rate hikes this year, allowing the board to pause and gauge inflation and growth risks linked to war.
Wrapping up the May policy meeting, the Reserve Bank of Australia (RBA) raised its main cash rate by 25 basis points to 4.35%, undoing all of the three rate cuts made in 2025. The board voted 8-1 in favor of the hike, a hawkish shift from March’s narrow 5-4 split.
Bullock said there were early signs that firms were looking to pass through rising costs to customers, and that three rate hikes should help keep inflation expectations anchored.
“We feel we are now in a position where we have got space to be alert to both sides of the risks, the inflation and potential risks to the downside, if the war continues,” she said at the post-decision press briefing.
The Australian dollar slipped 0.3% to $0.7145, while three-year government bond yields fell 5 basis points to 4.625%, the lowest in two weeks, as markets scaled back the odds of more near-term rate hikes.
Swaps imply around a 15% chance of a further move in June. An increase to 4.60% by September is about fully priced, which would be the highest since late 2011.
“Higher fuel prices are adding to inflation and there are indications that this is likely to have second-round effects on prices for goods and services more broadly,” the board said in a statement.
“The board assessed that inflation is likely to remain above target for some time and that the risks remain tilted to the upside, including to inflation expectations.”
Yet the RBA also emphasized that having raised the cash rate three times, “monetary policy is well placed to respond to developments,” hinting it might pause for now.
Inflation had already climbed to 4.6% in March, driven by higher fuel costs, while the closely watched core measure remained uncomfortably above the RBA’s 2%-3% target band.
The oil price spike triggered by the U.S.-Israeli war on Iran saw the RBA sharply raise its forecasts for inflation this year, tipping a peak near 5% while cutting the outlook for economic growth and employment.
Hormuz risk
“Today, the Board showed a clear preference to prioritize the price stability mandate. There is a strong message in this outcome, meaning that risks are biased towards a further adjustment in the cash rate,” said Sally Auld, chief economist at the National Australia Bank.
“For now, we have the RBA on hold at 4.35%.”
The RBA charted a softer course than its global peers during the post-pandemic inflation surge, prioritizing hard-won gains in the labor market over rapid tightening. Interest rates peaked at 4.35% early last year before three cuts pulled them back to 3.6%.
That gamble backfired in the second half of the year as inflation reignited, a risk now supercharged by the Iran war and a fresh global energy shock. The U.S. and Iran launched new attacks in the Gulf on Monday, lifting Brent crude futures to $114 a barrel, up over 50% from pre-conflict levels.
Business and consumer confidence in Australia crashed on fears that the war may tip the economy into a recession, while the housing market has lost steam amid higher borrowing costs and geopolitical uncertainty.
The labor market remains the outlier, with the jobless rate holding at a historic low of 4.3%.
The outlook hinges on the Strait of Hormuz, a vital route for about 20% of global oil flows, which Iran has effectively closed since the war began in late February.
“By August – in the absence of a rapid resolution to the conflict in the Middle East and a resumption of oil flows – we expect the activity data in Australia to be looking sufficiently soft to keep the RBA on hold,” said Adam Boyton, head of Australian economics at ANZ.
The International Monetary Fund’s (IMF) chief warned on Monday that inflation was already picking up and that the global economy might face a “much worse outcome” if the war in the Middle East drags on into 2027 and oil prices hit around $125 per barrel.
IMF Managing Director Kristalina Georgieva said the continuation of the war meant that the global lender’s “reference scenario,” assuming a short-lived conflict, which forecast a minor growth slowdown to 3.1% and a minor increase in prices to 4.4%, was no longer possible.
“This scenario, with every day that passes, is further and further behind in the rear-view mirror,” Georgieva said.
The continuation of the war, a forecast of an oil price around or above $100 per barrel, and rising inflationary pressures meant the IMF’s “adverse scenario” was already in effect, she said.
Long-term inflation expectations remained anchored, and financial conditions were not tightening, but that could change if the war continued, she told a conference hosted by the Milken Institute.
“Now, if this continues into 2027 and we have oil prices of $125 more or less, then we have to expect a much worse outcome,” she said. “Then we are going to see inflation climbing up, and then inevitably, inflation expectations would start de-anchoring.”
The IMF last month issued three scenarios for the global gross domestic product (GDP) growth path in 2026 and 2027 amid massive uncertainty over the war in the Middle East – the main “reference forecast,” a middle “adverse scenario,” and the much worse “severe scenario.”
The adverse scenario forecasts global growth slowing to 2.5% in 2026 and headline inflation of 5.4%. The severe scenario forecast growth of just 2% and headline inflation of 5.8%.
Chevron Chairperson and CEO Mike Wirth, speaking on the same panel, said that physical shortages in oil supply would begin appearing around the world because of the closure of the Strait of Hormuz, through which 20% of global crude supply passed before the war.
Economies will begin shrinking, first in Asia, as demand adjusts to meet supply while the strait remains closed because of the U.S.-Israeli war with Iran, Wirth said.
Georgieva said the IMF was carefully tracking the slow-moving impact of the conflict on supply chains, with fertilizer already 30% to 40% more expensive, which would drive food prices up between 3% and 6%. Other industries could also be affected.
“What I want to stress is that is really serious,” she said, expressing concern that many policymakers were still acting as if the crisis would end in a couple of months and were putting in place measures to cut the impact on consumers and business, which was keeping demand for oil high.
“Don’t throw gasoline on fire,” she said. “Everybody in this room knows that if your supply shrinks, your demand has to follow.”
Türkiye’s annual inflation reached its highest level in half a year in April, official data showed on Monday, in a rise that the government considers “temporary” and has been mainly driven by the pricing pressures from the fallout of the Iran war.
Consumer prices rose 32.37% last month from a year earlier, the Turkish Statistical Institute (TurkStat) said, up from 30.9% in March. That marks the highest measure since October 2025.
It’s the first read on inflation to capture the effects of the Iran war after both annual and monthly measures in March came below forecasts. Officials have said recent developments would impact but not change the disinflation trend.
On a monthly basis, prices rose 4.18%%, accelerating from 1.9% in March, driven mainly by increases in housing, water, electricity, gas and other fuels, the TurkStat data showed. Both annual and monthly readings exceeded forecasts.
The recent rise is temporary, and the disinflation process is expected to continue, Treasury and Finance Minister Mehmet Şimşek said on Monday.
Şimşek said energy and commodity prices have risen due to recent developments, creating short-term pressure on the inflation outlook, but added that the government is taking necessary steps to limit their impact.
Surveys had forecast monthly inflation at about 3.28% and the annual rate at around 31.25%, as the Iran war drives a sharp rise in energy prices.
The biggest monthly price rises in April came from the clothing and footwear sector, which saw 8.94% inflation, and the housing sector at 7.99%, while key food and drinks sector prices were up 3.7%, the data showed.
Transport sector prices jumped 4.29% in April.
Şimşek said inflation in services improved by 14.3 points compared to the same period last year, standing at 40.3% annually, while it was 16.5% in core goods.
The Iran war is dealing a huge shock to the global economy because Iran has blocked the Strait of Hormuz, the waterway through which around 20% of the world’s oil formerly passed on its way to customers from producers in the Persian Gulf.
The surge in energy prices poses a challenge for import-heavy economies like Türkiye.
“Although rising energy and commodity prices due to geopolitical developments exert pressure on the inflation outlook in the short term, we are taking the necessary steps within the framework of budget possibilities to limit these effects,” the minister wrote on the social media platform X.
Authorities have taken steps to limit the impact of the war through measures that include a fuel pricing mechanism, alongside measures to shield agricultural costs.
“We consider the rise in inflation to be temporary and foresee the continuation of disinflation. We will resolutely continue to implement our policies that will increase the welfare of our citizens by ensuring permanent price stability,” Şimşek wrote.
Türkiye’s inflation had peaked at 85% in October 2022 before easing to 64% by year-end and standing at around 65% in 2023. Disinflation began in 2024, bringing it down to 44%, followed by a further decline to 31% last year.
The TurkStat data also showed the domestic producer index rose 3.17% month-over-month in April for an annual increase of 28.59%.
In addition to refined petroleum products, food products, crude oil and natural gas, and chemicals were the major drivers of the April PPI increase, likely reflecting the impact of the U.S.-Iran war on some industrial materials and administrative pricing decisions, analysts at the Dutch financial giant ING said.
“Global commodity prices – particularly oil prices – in the current geopolitical backdrop will remain the key risk factors for the PPI trend in the near term,” they said.
The jump in energy costs due to the Middle East conflict and the resulting inflationary pressures have curbed central banks’ room to cut interest rates.
Central Bank of the Republic of Türkiye (CBRT) flagged rising inflation risks in its monetary policy committee statement last month, when it kept its benchmark policy rate steady, saying it was closely monitoring fallout from the Iran war and potential second-round effects.
Before the conflict began shifting expectations, the CBRT had been expected to continue a rate-cutting cycle that began in late 2024.
In February, the bank raised its year‑end inflation forecast range by two percentage points to 15%-21%, while keeping its interim 16% target unchanged.
It is due to present its second inflation report of the year next week. Analysts say it will likely feature a revision of both the target and forecasts.
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