Economic policy decisions crucial to preserve robust economic growth  

The economy continues to perform robustly with continued growth in consumption, employment, and tax receipts. Our forecast for Modified Domestic Demand is 3.8 per cent in 2025 and 2.9 per cent in 2026.

The agreement on tariffs between the US and the EU has removed much of the uncertainty for Ireland that prevailed in 2025. However, the new situation of a 15 per cent tariff represents a clear deterioration in Ireland’s trading environment relative to previous policy regime. This will impact the firms and sectors whose exports are most exposed to the US, placing a renewed focus on policies around trade diversification and competitiveness. 

In a Research Note published with the Commentary, John Fitzgerald examines the Irish pharmaceutical sector in detail. He considers the significance of the sector in the Irish economy and the implications of US trade policy.  This analysis suggests that, at least in the short term, US tariffs will impact profits of pharmaceutical companies operating in Ireland, rather than output or employment.

Housing output in the second quarter saw a welcome increase to 9,200 completions. We have revised our annual forecast for housing completions up to 35,000 for 2025. However, the notable slowdown in commencements in 2025 causes us to revise down our forecast for 2026 to 36,000 units. The outlook beyond the forecast horizon appears to be weakening with falling planning permissions and low commencements.

Inflation remains close to the target rate of two per cent. In this Commentary, we discuss recent increases in food price inflation and its differential impact across the income distribution, with lower and middle-income households more impacted by increases in food prices. In the labour market, growth remains positive, but there are signs of a modest softening. The rate of employment growth is easing, while the rate of unemployment is nudging higher. Meanwhile, the pace of earnings growth has decreased, and the number of employment permits being issued for roles outside of the public sector is slowing. In a Box published in the Commentary, Paul Redmond and Luke Brosnan use real-time data from LinkedIn to examine hiring trends by sector. These data also point to a very recent drop in hiring rates across sectors.

Tax receipts across the major headings are growing in the year to date in line with official forecasts. However, we detail how expenditure increases are outpacing the projected increases.

In our assessment, we suggest that the fiscal stance needs to be tightened in Budget 2026, in part to avoid overheating. We also discuss the EU-Mercosur trade deal and point to possible policy contradictions in opposing a free trade deal while assisting companies in seeking new markets.

Commenting on the report, author Alan Barrett of the ESRI stated: “Recent months have been characterised by uncertainty and volatility in the international economic environment, casting a renewed light on domestic policy. In that context, we point to the clear need for a tighter fiscal stance in Budget 2026. We also question opposition to the EU-Mercosur trade deal given Ireland’s reliance on international trade and investment.”

Commenting on the report, author Conor O’Toole of the ESRI stated: “Ireland’s economy has performed robustly in recent years despite uncertainties and is currently operating close to capacity. Addressing bottlenecks in housing and infrastructure is challenging at full employment and expenditure needs to be targeted and sequenced to address these constraints.”