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Ireland’s economic resilience continues, as Budget 2026 increases spending across the board

Quarterly Economic Digest – Q4 2025

PwC Insight Experience / Survey Template Hero
  • Insight
  • November 17, 2025

Growing demand and subdued inflation despite uncertainty

Our economy continues to expand, even as global uncertainty intensifies and consumer confidence wanes. We project domestic demand will grow until 2027. Inflation remains subdued, despite less restrictive monetary policy. Our unemployment rate remains below historical norms, while both Exchequer tax revenues and spending continue to rise.

Nevertheless, risks remain. Our economic output, employment levels and tax receipts rely significantly on a small number of companies. Budget 2026 expanded spending, including a 20% increase in funding for housing, but did little to broaden the tax base.

 

10.6%

GDP growth projected for 2025

1.9%

inflation projected for 2025

1 in 3

people work from home at least some of the time

20%

increase in expenditure on housing in Budget 2026

Section 1 Economic Output

Growth through 2025, then moderation

Ireland’s economy shows resilience to external shocks, but risks remain and growth is projected to moderate.

Ireland’s economic output is projected grow significantly in 2025, moderating in 2026. 

Following a 2.6% expansion in GDP in 2024 — revised upwards from 1.2% — we project growth of 10.6% in 2025 (see Figure 1). 

Notably, the Central Bank of Ireland (CBI) forecasts GDP growth of 10.1% this year, while the Economic and Social Research Institute (ESRI) expects growth to come in slightly lower at 8%. 

This year’s growth is largely a function of unusually large export volumes in the pharmaceutical sector in H1, in anticipation of additional tariffs. 

Base effects explain much of the moderation in growth projected for 2026. We project slight negative GDP growth of -0.6% in 2026, with the divergence in forecasts highlighting the uncertain external environment and differing data cut-off points. 

Bear in mind, while GDP is the global standard for measuring economic performance, it has limited ability to reflect the fundamentals of Ireland’s economy, due to distortionary effects.

 

Domestic demand on the rise

While GDP shows large fluctuations, domestic demand should grow steadily. 

Modified domestic demand (MDD), which more accurately reflects Ireland’s domestic economic activity, grew by 1.8% in 2024. Growth in 2025 is expected to be  3-4% , moderating to 2-3% in 2026 and 2.4% in 2027 (see Figure 2).

Household consumption remains the primary engine of MDD growth, supported by our robust labour market and wage growth. Consumer sentiment has trended downward over the past year (see Figure 3). 

The index, which stands at 59.9 in October, had recovered to 61.7 in September, from a previous low of 59.1 in July. 

Irish League of Credit Unions (ILCU) analysis suggests rising living costs and reduced fiscal supports in Budget 2026 may be driving this fall.

US tariffs and shutdown cast a shadow

Continued global uncertainty is a risk to Ireland’s exports.

Along with domestic demand, demand from our major trading partners is a major driver of Ireland’s economic growth. 

Headwinds remain, as the world adapts to changing US trade policy, and other countries’ policy responses. Our projections for growth across our trading partners are still more positive than in our previous Digest (see Figure 4). 

The impact of a prolonged US government shutdown is not yet clear. We project the US economy, which expanded by 2.8% in 2024, to moderate to 1.9% growth this year, followed by 2% growth in 2026 and 2.2% in 2027. 

Growth in the euro area remains modest, but our projections are slightly more upbeat than previously. We expect GDP to rise by 1.3% in 2025, 1.1% in 2026 and 1.4% by 2027. 

For the UK economy, we project growth of 1.5% in 2025, followed by 1.3% in 2026 and 1.7% in 2027.

Section 2 Inflation

Ireland’s inflation rate is forecast to continue to track close to target.

We project inflation of 1.9% in 2025, moderating to 1.8% in 2026, followed by a slight increase to 1.9% in 2027 (see Figure 5). 

The CBI forecasts a similar trajectory for the Harmonised Index of Consumer Prices (HICP), with inflation easing from 1.8% in 2025 to 1.4% by 2027. 

The ESRI anticipates a slightly higher inflation of 2% in 2025 and 2.2% in 2026. It highlights that the restaurants and hotels sector has driven inflation in recent years, accounting for one third of CPI inflation in 2025. 

Restaurants and cafes are primary drivers of these increases, with hotels and accommodation playing much smaller roles.

US and UK inflation to subside

As the US and UK see increases in 2025, inflation is expected to fall back towards 2% in 2026 and 2027.

We project inflation will range from 2% to 3.3% across the three economies shown in 2025, gradually declining towards the 2% target by 2027 (see Figure 6). 

We expect:

  • Euro area inflation to remain broadly stable at 2% in 2025, 1.9% in 2026 and back to 2% in 2027
  • US inflation to ease from 3.1% in 2025 to 2.7% in 2026 and 2.2% in 2027
  • UK inflation to fall more sharply, from 3.3% in 2025 to 2.4% in 2026 and 2% in 2027.

The inflationary impact of recent trade policy developments, particularly in the US, remains a key source of uncertainty, potentially affecting global supply chains and demand dynamics. 

The US’s latest inflation report shows a 3% increase in prices in the 12 months to September. The UK experienced inflation of 3.8% over the same period, while the figure for the euro area was 2.2%.

Section 3 Labour Market

Public and private sector vacancy rates diverge

The monthly unemployment rate held at 4.7% in August and September, down from July’s 4.8%.

Ireland’s job market remains resilient, with the seasonally adjusted unemployment rate unchanged over the last two months. 

But uncertainty is likely to weigh on investment and hiring decisions – particularly in the private sector. 

While headline job vacancy rates have remained around 1.3% for the past two years, vacancies in the private sector have fallen since 2022. 

Public sector vacancies have increased over the same period, offsetting this effect.

Work-from-home contingent stays steady 

While headlines on evolving home-working practices are top of mind, data show little change in recent years.

The share of the workforce that usually works from home increased dramatically in the past decade – as Figure 7 shows – from around 4% to around 20%. It has remained at this level for the past three years. 

Meanwhile, the share of people who sometimes work at home has increased each year since 2021. It’s now 17% of the workforce. 

In total, over one third of Ireland’s workforce works from home at least some of the time. 

This is in the context of a much larger workforce than a decade ago, with three quarters of a million more people now employed in Ireland.

 

Working into older age

Another important trend in Ireland’s labour market is the increasing share of workers aged over 65 

In 2015, 10.2% of those aged over 65 were in employment (see Figure 8). This has risen to 14.6% – in the context of a 41% increase in people in the State aged over 65. 

One major factor behind this change is the increased age at which the State pension is paid. Another is the increased retirement age for public servants. 

Section 4 Fiscal Outlook

Budget 2026 ups expenditure

An expansionary budget sees the largest increases in housing and transport, while debt servicing costs fall.

Budget 2026 increases spending across all major Government departments. The Government has budgeted for total spending in 2026 of €117.8 billion, €8.1 billion higher than in 2025. 

Of this increase, three quarters, or €6.1 billion, is additional current expenditure with the remaining €2 billion added to capital budgets. 

Figure 9 shows the allocation of spend across departments. All areas, with the exception of debt servicing, will see additional expenditure. The largest increases are in housing (20%) and transport (21%).

The Irish Fiscal Advisory Council has warned that while the Government is running a surplus, this is driven by extraordinary corporation tax revenues. Without these revenues, the Government would be running a deficit of almost €14 billion. The Council warns that spending is still growing rapidly, despite strong economic data.

Declining debt stands Ireland in good stead

While Government spending continues to grow apace, general Government debt relative to GDP remains in decline.

General Government debt as a share of economic output (GDP) has been on a steady downward trend for each of the five years shown in Figure 10. This is positive news and strengthens the State’s ability to respond to future shocks. 

The downward trend is a result of a combination of growth in GDP and a fall in debt levels. General Government debt stood at €207.5 billion at the end of Q2 of 2025, down from €226.7 billion in Q3 of 2020. 

By far the biggest factor driving down Ireland’s debt ratio is the enormous growth in GDP over the same period, with output increasing from €381.7 billion in 2020 to €562.8 billion in 2024.

Section 5 Topic in Focus: Ireland’s Economic Competitiveness

Global competitiveness rankings point to Ireland losing its edge.

Nonetheless, concern has been growing that Ireland’s competitiveness is under threat. In the past three decades, Ireland has transformed into a highly competitive, export-driven economy. Ireland is the seventh most competitive economy out of a sample of 69 worldwide, according to the IMD World Competitiveness Ranking 2025, but has fallen from second place just two years ago. As Figure 11 shows, there has been considerable variability in Ireland’s placing over the past five years, which may in part reflect the sensitivity of the relative ranking to minor changes in inputs.

The stakes are too high for complacency, however, as many of the fundamental factors that influence competitiveness take time to respond. Waiting to observe certain evidence of a loss of competitiveness in the data is not a winning strategy — we must remain focused on driving economic competitiveness.

Figure 11. Ireland's competitiveness rankings over time

Chart displaying Ireland's competitiveness rankings every year from 2020 to 2024

Source: IMD World Competitiveness Ranking

 

Ireland’s success is underpinned by strong performance in trade and foreign investment, combined with a young, talented workforce. However, to maintain our competitive edge, we must address structural challenges, especially in upgrading infrastructure and boosting innovation capacity, that could otherwise constrain future growth.

Robert Costello, Partner at PwC Ireland.

Ireland’s success is underpinned by strong performance in trade and foreign investment, combined with a young, talented workforce. However, to maintain our competitive edge, we must address structural challenges, especially in upgrading infrastructure and boosting innovation capacity, that could otherwise constrain future growth.

The IMD Ranking places Ireland 44th out of 69 countries for basic infrastructure, which includes transport, energy and water. Below, we examine five key pillars of Ireland’s economic competitiveness: trade, investment, innovation, labour market and infrastructure.

Trade is the bedrock of Ireland’s economy. As a small, highly globalised nation, we rely heavily on international markets to drive growth. In 2023, the total value of Ireland’s trade in goods and services exceeded €1 trillion for the second year in a row. Exports reached a record high of about €564 billion (a 3% annual increase), while imports were approximately €500 billion, leaving a substantial trade surplus of around €65 billion.

Services trade dominates Ireland’s external sector. Our export successes are led by high-value services — notably technology and business services. In fact, computer services accounted for 60% of Ireland’s service exports in 2023. The continued expansion of service exports, alongside pharma and med-tech goods (see the Q2 2025 QED), reflects Ireland’s highly developed knowledge economy.

Nearly half of all jobs in Ireland are supported by export-oriented trade and investment activities. We benefit greatly from EU membership — unrestricted access to the EU single market and numerous EU free trade agreements have helped Irish firms reach markets worldwide. Ireland’s trade ties with the US are exceptionally strong. With global geopolitical tensions and protectionist pressures rising, we must diversify our export markets while continuing to advocate for an open, rules-based trading system.

FDI is also central to Ireland’s competitiveness. We’ve built a reputation as a favoured destination for multinational companies, thanks to our pro-business policies, English-speaking talent pool and stable access to the EU market (see the Q1 2025 QED). Ireland today hosts over 1,800 multinational firms which collectively employ over 300,000 people. This highlights how pivotal FDI is for jobs and productivity.

Even amid global headwinds in 2022/2023, FDI employment in Ireland remained at record levels, holding above 300,000 jobs. This resilience underscored the diversified base of investors: while some tech companies slowed hiring, other sectors (modern manufacturing, financial services, life sciences etc.) continued to grow and add jobs.

The United States is by far the largest source of FDI in Ireland and this is concentrated in a handful of sectors. As geopolitical tensions rise, how Ireland’s FDI landscape will evolve is unknown. We must ensure that there are no unnecessary barriers to investment and seek to diversify the nature and source of that investment. Providing as much certainty to investors as possible at a time of great uncertainty globally is critical. Competitive corporate tax rates, a robust and efficient legal framework, and government support for innovation must remain in place to entice new investment.

Innovation is a key driver of long-term competitiveness, and Ireland’s performance here shows both strengths and weaknesses. Our economy hosts many innovative firms (especially multinational tech and life sciences companies) and a highly educated workforce. However, overall spending on research and development (R&D) in Ireland is low relative to peers, and indigenous innovation ecosystems (start-ups, venture funding etc.) are still developing.

Spending on R&D has been identified as a weak point. The National Competitiveness and Productivity Council noted that Ireland performs poorly in R&D investment and venture capital availability compared to other advanced economies. By the latest figures, Ireland’s total R&D expenditure is around less than 1% of GDP, substantially below the EU average of 2.2%. This gap partly reflects Ireland’s unique GDP (inflated by multinational profits), but even as a share of gross national income (GNI)*, R&D investment trails leading countries.

Low public R&D spending and a smaller domestic high-tech base contribute to this. The government has acknowledged this issue and in recent years has increased budgets for science and innovation. But the private sector’s R&D intensity remains modest outside the foreign multinational segment. The universities and Enterprise Ireland have a critical role to play in driving this change.

Ireland has a highly educated and growing workforce. Over half of our adults have some form of third-level education and among young adults, the tertiary attainment rate is above 60% — the highest in the EU. This abundance of skilled labour (especially in tech, science, finance etc.) attracts knowledge-intensive industries and boosts our productivity.

As our labour market has consistently shown, we’ve maintained effective full employment for several years now, highlighting the demand for these skilled workers. Our working population is young by EU standards. We’re seeing population growth and female participation in the labour force is at an all-time high. Nevertheless, skills shortages persist, leading to real wage growth.

While this is good news for workers, improving their living standards, it also has the potential to impact our competitiveness. We need to focus on improving infrastructure and expanding housing supply to reduce the cost of living for workers, which will have positive implications for Ireland’s competitiveness over the long run.

To sustain Ireland’s success in trade, investment and job creation, we must urgently upgrade our infrastructure capacity, especially in housing, water and energy. The housing shortage in Ireland is our most pressing issue. Years of insufficient homebuilding, coupled with surging demand, have led to skyrocketing housing costs and chronic undersupply. The ESRI warns that expensive and scarce housing is now directly affecting our competitiveness.

Multinational companies also have voiced concern that high rents and house prices are making it harder to attract and retain staff in Ireland. While housing construction has picked up from previous lows, it remains well below what we need to meet demand and clear accumulated shortages (see Figure 12). Furthermore, many believe that government targets are well below what’s needed to meet demand.

Figure 12. Housing completions vs. targets by year

Chart displaying Housing completions vs. targets by year

Source: CSO, Housing 4 All, Rebuilding Ireland

 

A strong focus on competitiveness is needed to ensure Ireland’s ongoing prosperity.

Our economy is highly competitive, but this leaves no room for complacency in a world of growing uncertainty and shifting priorities. We can strengthen our position considerably by diversifying trade, attracting investment from a wider array of countries, incentivising R&D, investing in people and skills, and improving access to housing and basic infrastructure. By doing so, we’ll attract the jobs of tomorrow and continue to raise the living standards of our residents. 

Section 5 Behavioural Issues

Keeping our biases in check

Cognitive biases are systematic errors in the way people reason with the world around them, due to our subjective perceptions of reality. 

Each quarter, we explore the what, where, when and why of a different bias.

Endowment effect influences how the public respond to budget cuts

The endowment effect is a cognitive bias where people assign more value to things they already have than to equivalent things they don’t. 

This tendency plays a significant role in shaping public reactions to government budget decisions, particularly when spending cuts are involved.

In public finance, the endowment effect becomes evident when citizens resist the reduction or removal of existing services, benefits or entitlements. 

People often perceive these provisions as part of their rightful share. Any attempt to alter or withdraw them is seen not just as a policy change, but as a personal loss – even when funds are being redirected to benefit the same people.

Consider a government that announces cuts to a long-standing subsidy. Even if the funds are being redirected to improve infrastructure or expand services in underserved areas, many individuals may feel disadvantaged. 

The emotional attachment to the existing subsidy, regardless of its efficiency or fairness, can outweigh a rational assessment of its merits.

This bias is particularly strong when the affected programme has been in place for many years. Citizens begin to view the programme as a permanent fixture, interpreting any change as a threat to their established entitlements.

How policymakers can counteract the endowment effect

Policymakers can take steps to reduce the bias’s influence, improving public acceptance of necessary budgetary changes

Explain the reasons for the change, including long-term benefits and the broader fiscal context. Avoid language that implies loss. Instead, emphasise improvement or modernisation.

Gradual transitions allow individuals to adjust and reduce the emotional impact of sudden change.

Offering compensatory measures or new benefits can help offset the perceived loss and maintain public trust. Sharing the analysis of how these changes will affect different groups is key.

Involving citizens in consultations and decision-making processes fosters a sense of shared ownership and reduces resistance.

Understanding the endowment effect is essential for governments seeking to reform public spending. By acknowledging the emotional dimensions of budgetary decisions, policymakers can design more effective and publicly acceptable reforms.

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Navigating economic uncertainties can be challenging, but you don’t have to do it alone. 

Our team offers expert insights and tailored solutions to help you understand and manage the complexities of the economic landscape. 

Contact us today to discuss any aspect of our insights and discover how we can support your business.

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Ciarán Nevin

Ciarán Nevin

Director, PwC Ireland (Republic of)

Email
Robert Costello

Robert Costello

Partner, PwC Ireland (Republic of)

Tel: +353 87 636 4014

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