Global developments to test economic resilience as inflation returns

Despite the disruptions from changes to US trade policy, the Irish economy ended 2025 and began 2026 with strong positive momentum. The labour market continued to perform resiliently with continued low unemployment. Modified Domestic Demand (MDD) grew strongly in 2025 on the back of increased household spending and a rebound in investment. 

This positive performance would have been expected to set the tone for 2026 and 2027 until the recent energy price spikes caused by the conflict in the Middle East. This has considerably lowered the global outlook and risks a return of sustained inflationary pressures in Ireland and abroad. We have revised our inflation forecast upward to 3.2 per cent for 2026 and 2.7 per cent in 2027. However, the magnitude of any impacts is dependent on the scale and duration of the crisis.

Considerable debate has arisen about the extent to which households should be insulated from price rises and we discuss this in detail in the Commentary. While different options are available, if required, ESRI research suggests a hierarchy of policy options to ensure any supports are time-bound and targeted to those most in need.

Despite the inflationary challenges, we still expect the domestic economy to grow in 2026 and 2027 with MDD growth of 2.1 per cent in 2026 and 2.8 per cent in 2027. Household expenditure will likely be supported by a continued robust performance in the labour market, and we expect the unemployment rate to remain below 5 per cent across the forecast horizon. 

While the recent international developments dominate short-term economic considerations, longer-term risks remain to Ireland’s continued economic success. These include the highly concentrated nature of Ireland’s tax revenues, the imbalance in productivity and performance between foreign-owned and domestic firms, budgetary overruns and the ongoing challenge of closing infrastructure deficits, especially with regard to housing. 

In terms of housing output, while a range of policy measures has been introduced recently, the underlying data (housing starts and planning permissions) do not yet point to a sustained rise. We expect 37,400 units to be completed in 2026, rising to approximately 38,000 in 2027. Furthermore, if recent energy price spikes feed through to construction inflation, this is likely to put downward pressure on production. 

In a Research Note published with this Commentary, FitzGerald and O’Shea return to the issue of the measurement of underlying economic developments in Ireland in the context of a large multinational presence. They show that the average annual growth in Net National Product over the period 2019–2024 was 4.8 per cent, but only 3.6 per cent when windfall corporate taxes are excluded.

Commenting on the report, author Alan Barrett of the ESRI stated: “This Commentary has been prepared against the backdrop of the Middle East crisis. At this point, we cannot know what the full economic impact will be, but we are already witnessing significant energy price increases. The inflationary pressures have generated calls for policies aimed at insulating households. Based on previous ESRI research conducted during the last energy crisis, we argue that measures should be targeted at those most in need to ensure maximum effectiveness in the use of public money.”

Commenting on the report, author Conor O’Toole of the ESRI stated: “In addition to short-term risks from global energy prices, longer term challenges (such as well-documented corporation tax vulnerabilities and infrastructure deficits) must remain a focus of policy. Dealing with these challenges, and in particular increasing housing output, will be made more difficult if inflationary pressures increase in an already-constrained economy.”