Domestic economy continues to perform despite global challenges — ESRI

Kenneth Fox

The economy continues to perform well, despite sustained global uncertainty, according to the Economic and Social Research Institute (ESRI).

While international headwinds are likely to lower external demand, strong investment demand is likely to contribute to a stronger-than-expected domestic performance.

Their analysis uses international research and financial market data to project energy prices in Ireland.

They expect oil prices in 2026 and 2027 to remain well above pre-war forecasts.

These effects are likely to increase domestic inflation across a range of areas. So far, while the annual inflation rate has increased to 3.6 per cent in May, price increases to date have been concentrated in energy.

However, they expect second-round effects to occur across the remainder of 2026.

In the context of food prices, the correlation between fuel price and food price increases is strongest after 8–10 months.

Overall, they expect an annual average rate of inflation of 3.7 per cent for 2026 and 3.1 per cent for 2027.

While household consumption is expected to slow due to rising inflation, stronger-than-anticipated investment (in particular in machinery and equipment) is likely to boost domestic demand.

Their forecast for Modified Domestic Demand incorporates these higher energy prices; they expect growth of 2.6 per cent in 2026 and 2.8 per cent in 2027.

They revised our annual forecast for housing completions up to 38,500 for 2026 and 40,500 for 2027.

However, the absence of sustained upward momentum in planning permission figures presents a challenge to raising output substantially and meeting housing targets in the medium term.

Tax receipts across the main tax categories are growing in the year-to-date.

A fuel package totalling €750 million was provided and accompanied by an increase in the expenditure ceiling for 2026. On the other hand, overruns in education spending are to be financed through a levy on other departments.

The  ESRI said the upcoming public sector pay talks provide the next setting in which this mix of readily available funds and political pressure will apply.

Both sides must recognise the vulnerability in the public finances and how the agreed terms in a public sector pay deal can spill over into the labour market as a whole.

Commenting on the report, author Alan Barrett from the ESRI said, “While the headline public finances figures look strong, we remain concerned about potential vulnerabilities.

"We also discuss how the apparent ready availability of revenues might be leading to sub-optimal policy, as evidenced by the lack of targeting in the fuel package.

"In that context, it is important that the upcoming public sector pay talks are based on a clear understanding of the public finances' vulnerabilities.”

Meanwhile, author Conor O’Tool said: "International headwinds are strong; fossil fuel prices remain elevated, and uncertainty remains around the conflict in the Middle East.

"These higher prices are likely to raise consumer prices in Ireland this year and next to a greater extent than previously anticipated."