Quarterly Economic Commentary, Spring 2026
This Commentary has been prepared during the second and third weeks of the Iran crisis. At the time of writing, it remains unclear how long the crisis will last and how intense the related global economic shock will be. However, it is already clear that energy prices have risen sharply and that higher prices are likely to persist for some time, even if the conflict ends soon. In preparing our forecasts, we draw on futures markets, which reflect the current elevated prices levels and an expected downward drift over the course of this year and into next.
The main impact of the Iran crisis for our forecasts is with regard to inflation. In our winter Commentary, we had expected Consumer Price Index (CPI) inflation to be 2.1 per cent in 2026. We now expect this to be 3.2 per cent in 2026 and 2.7 per cent in 2027, but a more prolonged conflict would imply higher rates with energy price rises leading to price rises across a wide range of goods and services. This generalised inflation would dampen economic activity.
The economy performed strongly in 2025. Exports grew by 9.6 per cent, although the pace of growth eased through the year. Modified domestic demand (MDD) grew by 4.9 per cent. Underlying this MDD growth was strong growth in consumption of 2.9 per cent and also a jump in modified investment, specifically in ICT. We expect the economy to continue to grow in 2026 and 2027, although at a slower pace – our forecast for MDD growth in 2026 is 2.1 per cent followed by 2.8 per cent in 2027. As with our inflation forecast, our broader forecasts will be reviewed in the light of the ongoing Iran crisis.
Housing output remains a core concern of policy and it is well understood that annual completions need to be approaching 50,000 units if national targets are to be met. An increase in output was registered in 2025 with 36,248 completions, compared to just over 30,000 in 2024. Based on the forward indicators that are currently available (commencements and planning permissions), it is difficult to see further upward momentum in housing output. For now, we expect housing output to remain in the mid-30,000s in 2026 and 2027.
Data in the latter part of 2025 appeared to show a softening in the labour market, but the data for the last quarter of 2025 showed employment growth rising again to 2 per cent. One concerning point in the latest Central Statistics Office (CSO) monthly unemployment release is an apparent rise in youth unemployment although we will need to track if this is also evident in the results of the quarterly Labour Force Survey.
In our assessment, we discuss how the Government might insulate households from the effects of the energy price increases if these increases persist at a high level. Based on previous ESRI work, we recommend against cutting indirect taxes on energy products due to poor targeting and adverse incentives. Flat-rated energy credits are better targeted than indirect tax cuts, but welfare changes are the most effective means of approaching this challenge if the goal is to insulate the most needy effectively.
Looking at longer-running challenges, we raise concerns about the capacity of the economy to deliver on so many infrastructure needs in a limited time-frame, and point to the need for prioritisation. This point becomes more important if the Iran crisis lead to construction inflation. We also note how tariff-related uncertainty has not ended and that policy in respect of domestic firms remains critical.