Irish economy resilient, but Mideast conflict fuels inflation

The Central Bank of Ireland has revised its domestic growth forecast upwards to 3.3 percent for 2026 and around 3 percent annually until 2028.

This optimistic outlook is primarily driven by exceptionally strong business investment, particularly in AI and data centres, which is effectively offsetting external headwinds.

However, the Middle East conflict continues to exert upward pressure on energy prices, worsening the inflation outlook and eroding household real incomes.

The Bulletin presents alternative scenarios, with a swift resolution leading to lower inflation and stronger growth, while a severe escalation could push inflation towards 5 percent and slow growth below 2 percent next year.

Even in a mild scenario, existing disruptions continue to exert upward pressure on inflation relative to pre-conflict expectations.

The economy must still absorb existing shocks, such as rising fertiliser costs impacting food prices as this year's crops mature.

Ireland's public finances face significant vulnerabilities, primarily from rapid expenditure growth and increasing reliance on corporation tax.

Public spending has grown by nearly 10 percent annually over the last five years, a rate deemed unsustainable.

This growth is heavily financed by excess corporation tax, with a sudden decline in these revenues potentially creating a €13.5 billion shortfall by 2028.

The Bulletin highlights the absence of an effective fiscal anchor, advocating for a credible expenditure rule to align spending with the economy's trend growth.

Addressing supply-side constraints in housing, energy, and transport infrastructure is also crucial for sustainable growth, as these bottlenecks limit current economic activity and potential growth.