Quarterly Economic Commentary, Winter 2025

Forecast Overview:

• Generally, the economy continues to perform well. The most recent data show strong growth in consumption expenditure (+2.8% in Q3) and in exports (+12.9% in Q3). Tax receipts also point to strong economic growth. For example, VAT receipts were 5% higher at the end of November compared to the same period in 2024, while income tax receipts were 4.6% higher. Taking a broad measure of economic activity, modified domestic demand was 5.3% higher in the 12 months ending Q3 2025 compared to the previous 12 months. Ireland’s strong economic performance has been supported by an international trading environment, which has remained robust in 2025 in spite of the uncertainties created by the Trump administration.
   
• While employment continues to grow, the rate of increase has moderated. Employment was 1.1% higher in Q3 2025 compared to Q3 2024 but the corresponding figure in Q2 was 2.3%. The rate of unemployment has also increased marginally and is now 4.9%. A slight weakening in the labour market is also evident in the latest weekly earnings data – weekly earnings are growing by 5% but this is a fall from the 6% recorded in late 2024.
   
• We now expect modified domestic demand to grow by 4.0% in 2025 and by 2.1% in 2026. The balance between 2025 and 2026 is related to a large increase in modified investment in 2025 and hence a base effect for 2026 rather than an underlying slowdown in 2026. We expect modest growth in employment this year of 2% falling to just over 1% next year. This relatively low rate of employment growth is expected to lead to a small increase in the rate of unemployment, from 4.8% in 2025 to 5.2% in 2026.
   
• While Q2 2025 saw a jump in housing completions to over 9,000 units, the number of completions levelled off in Q3. Based on three-quarters of data, it now seems likely that completions will be in the region of 35,000 for 2025. We expect a similar level of output in 2026 – if realised, this will mean another year when housing output will lag estimates of need.
   
• his Quarterly Economic Commentary (QEC) contains two boxes and a Special Article. In their box, Banahan and Slaymaker use data from the Residential Tenancies Board to show how trends in rents differ when viewed by tracking properties over time as opposed to tenancies. For example, property-level rents rose by an average of just 2.2% in the year ending Q1 2025, considerably lower than headline rental inflation.
   
• In a separate box, the ESRI climate team introduce a methodology for monitoring trends in economic output, energy consumption and emissions collectively. They find that decoupling between output and emissions is occurring in the industry sector but there is limited evidence of it occurring in the transport sector. From time to time, future QECs will include updates on these trends in an effort to track links between economic growth and greenhouse gas emissions. Our primary aim will be to assess whether the nature of growth in Ireland’s economy is compatible with climate goals. We will also track performance relative to targets as missing targets could have implications for the public finances if this results in fines for the Irish State.
   
• Bercholz et al. provide the annual distributional analysis of Budget 2026, using the ESRI tax–welfare microsimulation model SWITCH. Among their findings, they show how average household income is estimated to be 1.3% lower as a result of the budget compared to a situation where all parameters of the tax and welfare systems were indexed by price growth.
   
• In our assessment, we reflect on Budget 2026 and draw attention to concerns over the fiscal stance adopted. The loosening of the fiscal stance is at odds with the current state of the business cycle. In addition, there appears to be an increasing over-reliance on potentially volatile corporate tax revenues, which is also counter to recommendations in previous QECs. In contrast to the fiscal stance in Budget 2026, two further policy documents point to more encouraging policy formation – Future Forty and Accelerating Infrastructure –Report and Action Plan.