Quarterly Bulletin 2025:3 – Early signs of resilience as headwinds remain

• Modified Domestic Demand (MDD) is revised up for 2025 to 2.9 per cent but growth expected to slow to 2.3 per cent per annum on average in 2026 and 2027.
• Risks that further geoeconomic fragmentation could result in lower inward investment over time and more immediate challenges to the public finances given the reliance on large corporation tax revenues.
• Policies to tackle constraints to domestic growth - by closing infrastructure gaps in water, energy, transport, and housing – will also build resilience against the long-term challenges posed by geoeconomic fragmentation.

The Central Bank has today (18 September 2025) published its third Quarterly Bulletin of 2025. On the launch of the Quarterly Bulletin, Robert Kelly, Director of Economics and Statistics said:   “As the new trans-Atlantic economic relationship begins, businesses, households and policy-makers in Ireland continue to adapt to the changed environment.  The economic outlook is not as favourable as it would have been had US tariffs not been introduced, but the tariff rates covering EU-US trade are lower than had been expected earlier in the year.  Policy uncertainty still remains relevant both domestically and globally and Irish economic growth is expected to be impacted.”

“The strength of headline GDP in the first half of 2025 was partly due to multi-national enterprises responding to potential US tariffs by front-loading exports.  However there was also an underlying impetus to exports arising from the expanding pharmaceutical industry in particular, as well as growth in non-pharma exports.  Looking ahead, the manner in which affected MNEs react to increased costs due to higher tariff and non-tariff barriers will influence key indicators of the Irish economy. Rising production and distribution costs could eventually weigh on the profits of MNEs in Ireland over the medium term, having a negative impact on corporation tax revenues compared to recent trends. Upward revisions to government expenditure combined with an expected slow down in tax revenue growth (excluding excess corporation tax) is expected to result in the underlying budget deficit deteriorating further out to 2027.”

“Over the longer term, particularly if tariffs are accompanied by broader changes to US tax and industrial policies, there is a risk of lower investment flows and restructured MNE value chains. This could hinder the growth of economic activity and employment in Ireland, further exacerbating challenges for the public finances.  In a Signed Article  also published today, staff research points towards the prospect of Irish national income being in the region of 1 per cent lower over the long-term with the new US tariff regime now in place.  The potential impact differs across sectors, with models pointing to more negative outcomes for the foreign-dominated pharma and chemicals sectors, while the food and beverage sector is the most significant of the domestically-dominated sectors affected.  The analysis suggests that tariffs of the magnitude now being introduced are unlikely to lead to any significant reduction in existing foreign investment, but the potential loss of Ireland’s attractiveness as an export platform for new US foreign direct investment remains a key risk over the medium term.”

The economy is projected to continue to grow despite new tariffs on EU-US trade, more fragmented international trade generally and continued high levels of uncertainty.  Modified Domestic Demand (MDD) grew by 3.8 per cent in the first six months of 2025 compared to the same period of 2024, with employment up 2.8 per cent.  The outturn for the first half of 2025 indicates some positive momentum in economic activity, albeit that some signs of easing are emerging. The private sector job vacancy rate has fallen and growth in economic activity in the domestically-oriented sectors of the economy has been moderate in the first half of 2025. Overall, the positive outturn for the first half of 2025 along with additional government expenditure announced in the Summer Economic Statement has contributed to an upward revision to the MDD forecast for 2025 to 2.9 per cent, with MDD forecast to grow by 2.2 per cent and 2.4 per cent in 2026 and 2027, respectively.

Continued expected growth in real disposable incomes over the forecast horizon, amid a stable labour market, supports the forecast for continued growth in consumer spending of over 2 per cent per annum out to 2027.  With employment growth expected to slow to just under 2 per cent, a marginal rise in the unemployment rate is anticipated from its current levels of around 4.5 per cent, yet still remaining below 5 per cent. 

Domestic inflationary pressures are forecast to remain contained, although food price inflation has been relatively high lately due mainly to tighter supply conditions in European beef markets.  Food price inflation is forecast to moderate, however, whereas services inflation is expected to stabilise around 2.7 per cent out to 2027 given the strength of domestic demand, leading overall HICP inflation at 1.4 per cent in 2026 and 2027.

The outlook for domestic investment has been revised up for 2025 but the overall outlook is muted and forecasts are particularly sensitive to the performance of the MNE-dominated parts of the economy. Modified investment is forecast to grow in 2025 by 2.4 per cent, compared to the small decline of 0.6 per cent projected in QB2. The main reason for the more positive expected outturn in this forecast is revisions to historical investment data published by the CSO in July and more positive high-frequency soft data on business investment activity. Within modified investment the projection for housing completions has been revised downwards for 2026 and 2027 as constraints in water and energy infrastructure are expected to be marginally more binding on the number of dwellings that can be delivered in those years. Housing completions are forecast to stand at 32,500, 36,000 and 40,000 in 2025, 2026 and 2027, respectively. Offsetting weaker projected new housing construction, the forecasts for improvements and non-residential building and construction have been revised up modestly across the forecast horizon.

The underlying budget deficit (excluding estimated excess corporation tax) is now projected to be larger out to 2027 when compared with the previous Bulletin, reflecting additional expenditure measures announced by Government. The underlying general government balance (GGB) is estimated to have recorded a deficit of -2.1 per cent of GNI* in 2024. Latest Exchequer data shows growth in income tax and VAT, while remaining robust, has moderated in the first eight months of 2025, while cumulative corporation tax (CT) receipts are only marginally above the level for the same period last year (excluding receipts linked to the Apple State aid case). Gross voted expenditure has recorded strong growth so far this year, and the expenditure ceiling for 2025 has been revised upwards reflecting additional current and capital spending. As a result, the outlook for government expenditure growth for 2025 has been revised sharply upwards and an underlying deficit of -3.3 per cent is now anticipated for this year.  Over the coming years, spending growth is expected to remain elevated, particularly capital spending, while estimates of underlying revenue growth moderate in-line with overall economic activity.  As a result, the underlying GGB is projected to deteriorate further to -3.7 per cent of GNI* by 2027.

The threat of a further escalation of global trade tensions persists and means that risks to the current forecasts for economic growth are tilted to the downside.  Delays in alleviating key infrastructural deficits in water, energy and housing would worsen capacity constraints that are already having a negative impact on economic activity, further limiting the growth potential of the economy and possibly putting upward pressure on inflation.  Risks to the public finances are firmly to the downside owing to the vulnerability of government revenue to a loss of corporation tax and the pattern of persistent overruns in public expenditure.

Addressing the long-term challenges posed by geoeconomic fragmentation requires tackling the same constraints to domestic growth - by closing infrastructure gaps in water, energy, transport, and housing. This is essential to improve Ireland’s attractiveness for foreign direct investment and to contain the costs of living and doing business. Efficient public infrastructure delivery, achieved not only through increased capital expenditure but also reforms that would accelerate project timelines, can crowd-in private investment. However, the necessary rise in construction activity—a sector with below-average productivity—poses short-term risks of higher unit labour costs and inflation. To mitigate these risks, linking public capital spending to innovative delivery methods and incentivising scale in investment projects is crucial. Such initiatives can support productivity, ease inflationary pressures, and maximise the economic benefit from public investment.  More generally, facilitating greater business dynamism and more efficiency in capital re-allocation as young firms emerge will also contribute to higher productivity growth.

Reducing the risks to the public finances from an excessively narrow tax base has become more critical, given the reliance on corporation tax receipts from a small number of MNEs, which may be more vulnerable in light of geoeconomic fragmentation. Committing to a credible fiscal anchor that ensures sustainable growth in net government expenditure remains essential. This would establish effective counter-cyclical fiscal policy, enabling the public finances to support the economy as needed, and strengthen the public finances over time. Growth in government expenditure, especially recurring current expenditure, needs to be accompanied by a sustainable revenue-raising base given the vulnerabilities arising from persistent spending overruns and underlying budget deficits.  Additionally, broadening the tax base is necessary to create the fiscal and economic capacity to increase public capital investment as envisaged in the National Development Plan and to cover the rising costs that are emerging to sustain public services at their existing levels.

Previous Quarterly Bulletins are available to view on the Central Bank’s website.

Further information

Media Relations: [email protected]

Úna Quinn: [email protected] / 086 067 4008

Elaine Scanlon: [email protected] / 087 213 6313