Credit growth rebounds, but households remain under pressure

Indonesia's banking sector appears to be recovering, with credit growth returning to double digits in May. Yet beneath the encouraging headline, households face mounting financial pressure as consumer lending slows, layoffs rise, savings decline and purchasing power weakens. The contrast highlights a broader challenge: A banking recovery does not necessarily signal an improvement in the real economy.

Credit growth rebounded to 11.51 percent in May 2026, marking a welcome improvement after lending growth had remained in single digits since February 2025 and lagged behind third-party funds (DPK) growth since August 2025. However, the recovery masks a more concerning reality. Consumer credit remains weak, while households continue to save a smaller share of their income amid mounting cost-of-living pressures. Although stronger credit growth is encouraging, persistently weak purchasing power points to structural challenges that cannot be resolved through short-term policy incentives alone.

The Financial Services Authority (OJK) remains optimistic that bank lending will grow by 10 percent this year. Its confidence is supported by the banking sector's strong capital and liquidity positions, as well as the recent rebound in overall lending. The outlook has remained resilient despite Bank Indonesia raising its benchmark interest rate by a cumulative 100 basis points in June to defend the rupiah against further depreciation.

Nevertheless, the headline figures conceal an uneven recovery. Investment lending expanded by a robust 21.95 percent, while consumer lending grew by only 5.89 percent. Large banks have also adopted a more cautious approach to retail lending, including mortgages, vehicle financing and unsecured loans.

The divergence matters because investment-led credit expansion can support future productive capacity, but without stronger household demand its impact on near-term economic growth will remain limited.

Persistently high inflation and rising energy prices have increased credit risks among households, contributing to a deterioration in asset quality. As a result, the banking sector's non-performing loan (NPL) ratio rose from 2.05 percent in December 2025 to 2.17 percent in May 2026.

The slowdown in consumer credit should serve as an early warning for the broader economy. Household consumption accounts for roughly 60 percent of Indonesia's GDP, making it the country's primary growth engine. Yet household sentiment has weakened steadily this year.

The Consumer Confidence Index (IKK), a key indicator of household spending and saving behavior, declined from 127 in January 2026 to 117 in June. Although the index remains above the neutral threshold of 100—indicating that consumers are still broadly optimistic—confidence has weakened across all income groups, with the sharpest decline recorded among middle-income households.

The weakening outlook is also reflected in consumers' assessment of current economic conditions, including income, job availability and prospects for purchasing durable goods. More importantly, these concerns are increasingly being borne out by labor market conditions. At least 19,530 workers were laid off in June, representing a 23-fold increase from just 829 in May. The sudden spike reversed the declining layoff trend observed between February and May.

The deteriorating labor market is also reflected in a recent Litbang Kompas survey, which found that around 80 percent of respondents believed finding a job in their local area had become increasingly difficult.

One of the underlying drivers is Indonesia's continuing deindustrialization. Manufacturing activity remains under pressure, with the Manufacturing Purchasing Managers' Index (PMI) falling to 46.9 in June 2026, signaling continued contraction. The index has remained below the expansion threshold since May, reflecting persistent policy uncertainty and a less supportive business climate.

Meanwhile, rising living costs continue to erode household financial resilience. The average propensity to consume increased further, reducing the saving-to-income ratio from 17.5 percent in May to 17 percent in June 2026. The decline was even more pronounced among middle-income households, whose saving ratio fell to 16.9 percent. This suggests that many households are increasingly relying on current income to meet daily expenses, leaving little room to build financial buffers against future economic shocks.

Taken together, these indicators suggest that while macroeconomic and banking data point to improving conditions, many households continue to face mounting financial pressure. Rising layoffs, weakening consumer confidence and declining household savings all indicate that the recovery has yet to translate into stronger household welfare.

Without policies that strengthen formal employment, restore purchasing power and improve the investment climate, stronger credit growth alone is unlikely to deliver a durable and inclusive economic recovery.