Domestic economy continues to perform despite global challenges

The economy continues to perform well, despite sustained global uncertainty. While international headwinds are likely to lower external demand, strong investment demand is likely to contribute to a stronger than expected domestic performance.

The Commentary uses international research and data from financial markets to project energy prices in Ireland. We expect oil prices in 2026 and 2027 to remain well above pre-war forecasts. These effects are likely to increase domestic inflation across a range of areas. So far, while the annual inflation rate has increased to 3.6 per cent in May, price increases to date have been concentrated in energy. However, we expect second-round effects to occur across the remainder of 2026. Box B in the Commentary addresses this issue in the context of food prices, finding that the correlation between fuel price and food price increases is strongest after 8–10 months. Overall, we now expect an annual average rate of inflation of 3.7 per cent for 2026 and 3.1 per cent for 2027.

While household consumption is expected to slow due to rising inflation, stronger than anticipated investment (in particular in machinery and equipment) is likely to boost domestic demand. Our forecast for Modified Domestic Demand incorporates these higher energy prices; we expect growth of 2.6 per cent in 2026 and 2.8 per cent in 2027.

We have revised our annual forecast for housing completions up to 38,500 for 2026 and 40,500 for 2027. However, the absence of sustained upward momentum in planning permission figures presents a challenge to raising output substantially and meeting housing targets in the medium term.

Box A in the Commentary analyses emissions data and finds evidence of decarbonisation in the transport and industry sectors, but less so in agriculture.

Tax receipts across the main tax categories are growing in the year to date. The Commentary discusses the different approaches adopted to address two cost pressures that emerged in 2026. A fuel package totaling c.€750 million was provided and accompanied by an increase in the expenditure ceiling for 2026. On the other hand, overruns in education spending are to be financed through a levy on other departments.

The Commentary, drawing on a paper by Bercholz et al. published alongside it, discusses how the Government’s approach to the fuel package was not ideal due to the lack of targeting. It discusses how the ready availability of revenue, and hence the weak budget constraint, appears to be contributing to conditions where policy is sub-optimal. 

The upcoming public sector pay talks provide the next setting in which this mix of readily available funds and political pressure will apply. It is important that both sides recognise the vulnerability in the public finances and how the agreed terms in a public sector pay deal can spill over into the labour market as a whole.

Commenting on the report, author Alan Barrett of the ESRI stated:

“While the headline public finances figures look strong, we remain concerned about potential vulnerabilities. We also discuss how the apparent ready availability of revenues might be leading to sub-optimal policy, as evidenced by the lack of targeting in the fuel package. In that context, it is important that the upcoming public sector pay talks are based on a clear understanding of the public finances vulnerabilities.”

Commenting on the report, author Conor O’Toole of the ESRI stated:

“International headwinds are strong; fossil fuel prices remain elevated, and uncertainty remains around the conflict in the Middle East. These higher prices are likely to raise consumer prices in Ireland this year and next to a greater extent than previously anticipated.”