Economic output is expected to fall after an exceptional performance in 2025
Ireland’s economy is expected to shrink this year with GDP projected to fall by 2.5%, following growth of 12.3% in 2025. Modified domestic demand is also expected to moderate, from 4.6% in 2025 to 2.7% in 2026. Consumer sentiment remains subdued, with modest improvements in May and June, but still down from our previous Digest, as global events weigh on confidence.
The inflation outlook for 2026 has worsened, increasing to 3.1%, due to the ongoing war in the Middle East. Inflation is expected to return to closer to target in 2027. The seasonally adjusted unemployment rate has increased slightly to 5% in June.
Government spending continues to expand with additional unplanned expenditure of €505 million announced in response to increasing energy costs.
Overall, Ireland’s economic performance is expected to moderate in the coming years.
Section 1 Economic Output
Irish GDP expected to fall in 2026 after exceptional 2025 outturn
GDP is set to fall by 2.5% in 2026, following an exceptional 2025 outturn driven by multinational sector activity and front-loaded exports. The economy expanded by 12.3% in 2025, largely reflecting a surge in pharmaceutical exports to the US ahead of anticipated tariff measures. The Central Bank has noted that 95% of the 17.5% rise in merchandise exports was accounted for by a single product group, polypeptide hormones, while non-pharmaceutical goods and services exports were broadly flat.
The headline figure also masks considerable volatility, with the GDP falling by 12.1% in Q1 2026, when compared with the previous quarter. Ireland’s GDP volatility continues to be distorted by multinationals, impacting euro area aggregations. Ireland’s economy makes up around 4% of euro zone GDP, but the 12.1% fall was so significant it caused a 0.2% contraction in euro area GDP.
We project that GDP will contract by 2.5% in 2026, before increasing by 3.7% in 2027 and 3.8% by 2028. The trajectory may signal the return of a more normalised growth path.
MDD points to steadier underlying growth
Modified Domestic Demand (MDD), which strips out multinational-related distortions, provides a clearer view of underlying economic performance. CSO data confirm that MDD grew by 4.6% in 2025. This was underpinned by strong consumption growth alongside a notable jump in modified investment, particularly in information and communications technology (ICT).
We project that MDD growth will moderate to 2.7% in 2026, before easing further to 2.5% in 2027 and 2028. The trajectory points to a steadier underlying growth path, supported by a robust labour market and ongoing capital investment in housing, infrastructure, and the energy transition, although momentum is expected to soften in the near-term as higher global energy and commodity prices weigh on real incomes.
Consumer sentiment strengthens after sharp fall at start of 2026
Irish consumer sentiment deteriorated significantly in the beginning of 2026, falling from 64.7 in January 2026 to 53.3 in April 2026. Sentiment strengthened slightly in May and again in June, now sitting at 62.2 (see Figure 3). Consumer sentiment is below both the January 2025 reading of 74.9 and the long-term survey average of 83.3, as noted by the Irish League of Credit Unions. The underlying trend has continued to drift downwards, reinforcing the picture of weakening household confidence. Subdued sentiment likely reflects the impact of cost-of-living challenges, economic uncertainty and geopolitical uncertainty, which together appear to be weighing on households’ near-term outlook.
The euro area is taking a cautious approach as the global growth outlook softens before gradual recovery
Growth across Ireland’s key trading partners is expected to soften in 2026 before recovering gradually over the medium-term, reflecting the drag from higher energy and commodity prices, ongoing geopolitical uncertainty, and the lagged effects of earlier monetary tightening (see Figure 4).
We project euro area growth to ease from 1.4% in 2025 to 0.9% in 2026, before rising to 1.3% in 2027 and 1.4% in 2028. We expect US growth to remain the most resilient among major economies, holding broadly steady at 2.1% in 2026, 2.1% in 2027, and 2.0% in 2028. We project UK growth to slow more sharply, from 1.4% in 2025 to 0.9% in 2026, before recovering slightly to 1.2% in 2027 and 1.7% in 2028.
The outlook remains subject to elevated uncertainty, particularly around the impact of developments in the Middle East on global commodity markets. Even after de-escalation, the lagged effects of recent energy and commodity price shocks are likely to continue feeding through to inflation and activity over the coming quarters.
On balance, while the near-term external growth environment for Ireland has weakened, the medium-term outlook remains one of gradual recovery across major economies, providing a supportive backdrop for Irish exports and domestic demand.
Section 2 Inflation
Ireland’s inflation outlook points to a near-term uptick before slowing down
Ireland’s inflation outlook has shifted since our previous update, with revised forecasts pointing to a noticeable uptick in 2026 before returning to close to target over the medium-term. Inflation registered 2.2% in 2025, and we project it will rise to 3.1% in 2026, before easing to 2.3% in 2027 and 1.8% in 2028 (see Figure 5). This trajectory reflects renewed near-term price pressures, particularly from energy, food, and domestic services, before disinflationary forces reassert themselves as commodity base effects fade and goods inflation continues to normalise in line with wider euro area trends. While headline inflation remains contained relative to the peaks observed in 2022 and 2023, the projected pick-up in 2026 underscores that the disinflation process is neither linear nor complete and is highly dependent on global events.
At a sectoral level, energy has re-emerged as the most volatile driver of inflation. The Central Bank projects energy inflation to swing from -0.3% in 2025 to 9.6% in 2026, before easing to 2.2% in 2027. AIB notes that, with oil prices spiking amid Middle East tensions, the current shock is centred on a region accounting for over 20% of global oil output, although contained European gas prices should limit the overall pass-through. Food inflation is also a key upside driver, with the Central Bank forecasting 2.2% in 2026 and 3.8% in 2027, following a 3.7% rise in unprocessed food prices during 2025. Services inflation remains the most persistent source of underlying pressure, projected at 3.7% in 2026 and 3.4% in 2027, with the ESRI highlighting that restaurants, hotels, and other labour-intensive categories continue to contribute strongly, supported by resilient consumer demand and sustained wage growth in a still-tight labour market.
Renewed energy pressures lift global inflation forecasts
Inflation projections for Ireland’s key trading partners have been revised higher since our previous Digest, reflecting the renewed surge in global energy and commodity prices, although the broad disinflationary trend is expected to reassert itself from 2027 onwards (see Figure 6). We project euro area inflation, which stood at 2.0% in 2025, to rise to 2.7% in 2026 before easing to 2.2% in 2027 and 2.0% in 2028. We expect US inflation, having registered 2.7% in 2025, to increase to 3.4% in 2026, before falling to 2.2% in 2027 and holding at 2.2% in 2028. Inflation in the UK was 3.4% in 2025 and we project it to remain elevated at 3.3% in 2026 before moderating to 2.4% in 2027 and 2.0% in 2028.
These developments reflect the offsetting forces of higher energy and food prices on the one hand, and softening global goods prices, moderating wage pressures and the lagged impact of earlier monetary tightening on the other. The ECB increased its interest rates by 25pp in June 2026, stemming from increased uncertainty due to the war in the Middle East and revised its euro area inflation projections upwards by 0.1 percentage point in 2026. The Federal Reserve has likewise adopted a more cautious tone, with some officials suggesting that further policy tightening could be required if inflation pressures from the war in the Middle East prove persistent, while the Bank of England is expected to proceed gradually with rate reductions through 2026 as UK inflation eases. Evolving global trade policies continue to pose upside risks to inflation by affecting supply chains and import prices. The ongoing disruption to commodity flows through the Strait of Hormuz adds a further layer of imported price pressure. On balance, while the near-term external inflation environment for Ireland has become less benign, the medium-term outlook remains one of gradual convergence towards target across major economies.
Section 3 Labour Market
Unemployment rate ticking upwards
The seasonally adjusted unemployment rate increased to 5.0% in June. Unemployment edging relatively higher, suggests job creation is moderating after several expansionary years.
Female participation in the labour market is most concentrated in education and human health
Female participation in Ireland’s labour market is steadily increasing. In Q1 2026, female employment reached 1,307,100 persons, making up 47% of the workforce. Figure 8 outlines the economic sectors women are most and least represented in. Over 75% of the education and human health sectors are made up of female employees with less than 15% of the agricultural and construction sectors represented by females. The most balanced economic sector, which has a 50:50 split of male and female workers, is professional services.
Men dominate top earnings across all sectors, even where women dominate the workforce
Across all economic sectors, males account for approximately 72% of the top 1% of earners, 69% of the top 10% and 61% of the top 25%. The corresponding female shares, 28%, 31% and 39%, indicate that while gender representation across total employments is near parity (53% male to 47% female in Q1 2026), income distribution remains heavily skewed. The construction sector has the highest concentration of male top earners, which is unsurprising due to the sector’s overall gender composition as previously highlighted in Figure 8. A female dominated sector, human health, provides the clearest evidence of structural barriers to top-earning roles. While females account for approximately 69% of the top 25%, their share falls sharply to around 48% at the top 10% and just 38% at the top 1%. In contrast, males, representing less than a quarter of total employment, hold nearly 62% of the top 1% earning positions. This is the widest inversion between workforce composition and top-earner representation of any sector examined.
Section 4 Fiscal Outlook
Ireland maintains budget surplus amid global geopolitical tensions
Ireland retains a budget surplus for the fourth consecutive year in 2025, highlighting a strong fiscal position. While four consecutive surpluses signal an improved fiscal baseline, the volatility in the surplus level, rising from circa €8 billion in 2022 to over €20 billion in 2024 before moderating to €11 billion in 2025 highlights the concentration of revenue sources (see Figure 10). Ireland’s fiscal position remains exposed to a relatively narrow corporate tax base, meaning that a portion of these surpluses may be windfall or non-recurring in nature.
Fiscal management to address the windfall nature of corporate tax receipts
The persistence of surpluses through 2025 provides the Exchequer with increased fiscal headroom, creating opportunities to address structural challenges while also building fiscal buffers (The Future Ireland Fund or The Ireland Strategic Investment Fund). However, prudent fiscal management will require distinguishing between permanent and temporary revenues to avoid embedding unsustainable spending commitments. Emergency support packages, such as the €505 million fuel supports, while feasible to introduce during periods of surplus, risk embedding recurring expenditure commitments that could place significant pressure on future budgets as windfall revenues decline.
Debt to GNI* ratio to fall below 60% in 2026
Figure 11 presents both the level of gross General Government Debt (GGD) and its ratio to Gross National Income (GNI*). GGD is estimated at approximately €212 billion in 2025 and has broadly remained around the €200 billion mark since 2011, notwithstanding a temporary increase to a peak of €235 billion in 2021 driven by the response to COVID‑19. Over the same period, the debt-to-GNI* ratio has declined significantly. This reflects strong growth in GNI*, which has reduced the relative burden of debt even as the nominal stock has remained elevated. The NTMA forecasts GGD could reach €240 billion by 2030 and notes the era of record low interest rates, which made servicing debt easier and cheaper, is coming to a close. These developments, combined with Ireland’s budget surplus being bolstered by windfall corporation tax, has the potential to negatively impact future debt servicing.
Section 5 Behavioural Issues
Each quarter we take the opportunity to keep our biases in check
Cognitive biases are systematic errors in the way individuals reason with the world around them due to subjective perceptions of reality. In this section, we explore the what, where, when, and why of a different bias each quarter.
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