Strength of economy to be tested by domestic challenges and a period of global uncertainty

While the Irish domestic economy appears to be in a relatively robust state, notable international and domestic risks are clouding the outlook. Global uncertainty has risen to very elevated levels given the fallout from changing US trade policy and geo-political developments. This increase in uncertainty is likely to weigh on investment and consumer spending.

In relation to announced tariffs, Ireland has been insulated somewhat, up to now, because of the exclusion of pharmaceutical goods. In addition, the relative importance of services in total Irish exports provides short-term protection from tariff impacts but raises concerns about non-tariff barriers to services trade being imposed in future US-EU negotiations. Given these developments, we expect GDP to grow by 4.6 per cent in 2025 and 2.9 per cent in 2026, with exports growing by 5.4 per cent and 3.3 per cent respectively. If trade wars between the US and its trading partners intensify, this forecast will need to be revised downwards.

In regard to the domestic economy, we expect growth to continue, but at a relatively slower pace than in the previous Commentary. Our baseline forecast is for Modified Domestic Demand growth of 2.3 per cent in 2025 and 2.8 per cent in 2026. Inflation is projected to average 2.0 per cent in 2025 and 2.1 per cent in 2026. The risks to the inflation outlook are primarily to the upside, as a tight labour market and strong nominal wage growth could potentially exert upward pressure on domestic prices, as could external shocks to energy prices. The unemployment rate is projected to remain close to 4 per cent over the forecast period.

The relatively strong domestic economy faces two primary challenges. The public finances are heavily dependent on windfall corporation tax receipts and residential construction is not accelerating sufficiently quickly to meet housing need.

Total tax receipts are growing in the year to date. However, a dip in corporate tax revenues in May served as a reminder of the potential vulnerability in the public finances due to the importance of this windfall source of revenue. Expenditure, which is increasing faster than planned in Budget 2025, has increased considerably relative to the size of the domestic economy in recent years.

Housing completions are forecast to increase from 30,330 last year to 33,000 in 2025 and 37,000 in 2026. This represents a reduction from our previous forecast for the current year reflecting the first quarter outturn and the ongoing structural challenges including production costs, supporting infrastructure, financing, and labour shortages.

Commenting on the report, author Alan Barrett of the ESRI stated: “The economy continues to perform well and the ongoing increase in the numbers employed in Ireland is very welcome. However, it is difficult not to be unsettled by global uncertainties. While the headline public finance figures appear healthy, the fact that Ireland is running a fiscal deficit (once the headline numbers are corrected for windfall revenues) appears risky.”

Commenting on the report, author Conor O’Toole of the ESRI stated: “Despite the clouded international outlook, the domestic Irish economy appears to be performing robustly. Capacity issues in infrastructure and housing are likely to constrain long-term growth and need continued emphasis in terms of public expenditure.”