Higher energy prices and continued AI investment create economic cross currents for Ireland
Two cross currents in the global economy are impacting the Irish economy in different ways. Firstly, continued conflict in the Middle East, the closure of important shipping channels, and destruction to refinement capacity are contributing to higher energy prices.
On the other hand, investment in AI-related infrastructure continues to rise. Ireland, with its strong technology sector and openness to trade, may be well positioned to benefit. However, there are risks associated with this expansion in investment. Rapid investment in new technologies comes with expectations of returns on those investments, which may not materialise.
In addition, international borrowing costs are rising, particularly for governments with pre-existing fiscal vulnerabilities in the form of large deficits, high debt levels and low projected economic growth. Despite Ireland’s relatively strong headline fiscal position, we are not immune to the general trend of higher borrowing costs.
Housing output and the infrastructure required to support it remain core concerns for the Irish economy and society. Our annual forecast for housing completions is 39,200 in 2026 and 40,500 in 2027.
Pass-through of higher energy costs into inflation in other sectors remains limited to date. However, the possibility remains that indirect effects on food prices and knock-on impacts on expectations and wage demands could occur in the coming months. Employment growth has remained slow in 2026, though unemployment remains low, standing at 5 per cent in the second quarter of 2026.
Budget decisions must trade off domestic challenges and international risks. Cautious management of the public finances, particularly in the presence of large windfall corporate tax receipts, does not mean that specific challenges cannot be addressed. The Commentary again draws attention to a long-standing proposal aimed at reducing the level of child poverty through the introduction of a second means-tested tier of child benefit. An increased focus on capital expenditure is also recommended to address underlying infrastructure deficits and boost productive capacity of the domestic economy.
Commenting on the report, author Alan Barrett of the ESRI stated: “The economy continues to perform well, but we remain concerned about some troubling international trends. The ongoing conflict in Iran continues to lead to higher energy prices and central banks are increasing short-term interest rates in response. But market dynamics are also leading to increases in longer term borrowing costs for governments, including Ireland. AI investments are providing a positive boost to the global economy, but there are risks here too, for example, if returns on the investments disappoint.”
Commenting on the report, author Conor O’Toole of the ESRI stated: “Despite rising energy prices internationally, as an open, globally connected economy, Ireland is well positioned to benefit from global AI tailwinds. However, the increased reliance on multinationals for taxation revenues leaves Ireland in an extremely vulnerable position, especially if windfall revenues decline.”