Quarterly Bulletin 2025:4 Prudent ambition needed as multinational investment underpins more positive growth outlook

• MDD is projected to grow by just below 4 per cent in 2025. From 2026 to 2028, MDD is forecast to grow at an annual average rate of 2.9 per cent per annum.
• More positive momentum in MNE investment amid lower uncertainty contrasts with slower pace of growth in domestic sectors and cooling of the labour market as drag from capacity constraints becomes evident.
• Outlook for slightly higher overall inflation, as underlying services price growth more persistent at a higher rate than pre-pandemic.
  

The Central Bank has today (19 December 2025) published its fourth and final Quarterly Bulletin of 2025. On the launch of the Quarterly Bulletin, Robert Kelly, Director of Economics and Statistics said: “Despite the notable challenges the Irish economy has faced this year it has shown resilience throughout 2025. The outlook for the Irish economy in the medium term is being shaped by differing sectoral performances, ongoing structural change, geopolitical tensions and policy actions both at home and abroad. Multinational sectors that predominantly export are adapting to a changing international environment for trade and investment, and so far that adjustment has been relatively benign for Ireland. Domestic activity signals are more mixed, with data pointing to a slower pace of growth and higher inflation.”

“How the multinationals have adapted to the changing EU–US trade and investment relationship, particularly pharmaceuticals remains a central driver of Ireland’s headline economic indicators. Ireland is a major hub for producing high‑demand medicines, yet firms have announced intentions to change pricing polices across their markets and their related value‑chain management and investment strategies.  This could lead to greater volatility in headline GDP and alter the pattern of the volume and value of activity located in Ireland relative to elsewhere in the pharma value chain, with knock‑on effects for profitability and corporation tax receipts. Meanwhile, the ICT services sector - another major global sector with a significant presence in Ireland - both enables and is being reshaped by rapid advances in AI. Creating conditions for the Irish‑resident ICT sector and the wider economy to benefit sustainably from this transformation is increasingly important in a more fragmented global landscape.”

“As a small, highly globalised economy, Ireland’s prosperity will always be influenced by its attractiveness to foreign direct investment. Yet developments in the domestically-oriented economy and indigenous exporters are decisive for long‑term, sustainable growth in employment and living standards. Gauging domestic performance is challenging given frequent revisions to National Accounts data and the influence of MNE investment on even “modified” activity measures.  Nonetheless, after several years of operating above potential, momentum in the domestic economy is easing, reflected in lower employment growth and a slower pace of activity in domestic sectors. This is broadly consistent with an economy facing significant capacity constraints, and it reinforces the need to improve supply‑side conditions that ultimately determine the domestic economy’s capacity to deliver sustainable gains in living standards.”

Taking account of the realised performance in the year to date along with the stimulus from additional Government expenditure for 2025 announced subsequent to the Budget, overall MDD is projected to grow by just below 4 per cent in 2025. From 2026 to 2028, MDD is forecast to grow at an annual average rate of 2.9 per cent per annum. This marks an upward revision to the projections for 2026 and 2027 from QB3. The improved outlook compared with QB3 is largely due to an upward revision to the forecast for modified investment.  This is informed by the resilient outturn for MNE investment in the year to date (most notably in intangible assets), a smaller than previously estimated drag on investment from uncertainty over the forecast horizon as well as Government policy decisions that are assumed to support higher investment, especially towards the end of the forecast horizon.

Despite the improvement to the outlook compared with the forecasts in September, the projections envisage a slowdown in MDD growth from the 6.1 per cent annual average realised outturn from 2021 to 2024. The projected slowdown in growth is informed by a number of considerations.  The rapid growth in employment and incomes that underpinned consumer spending since 2021 is expected to continue to moderate, feeding into a lower projected pace of growth in MDD. The cooler labour market is expected to see employment growth easing to below 2 per cent, while the unemployment rate is expected to average 5 per cent and average wage growth easing back from 4.6 per cent this year to 3.5 per cent in 2028.  Despite the expectation of a pickup in construction activity, with housing output forecast to reach 44,500 units in 2028. growth in overall modified investment is expected to be more modest.

A large increase in pharmaceutical exports has contributed to double-digit GDP growth in the first three quarters of 2025. The pace of growth in pharmaceutical exports eased in Q2 following the exceptional Q1 outturn, which was influenced by a frontloading of exports to the US. However, a combination of the growth in non-pharma goods exports and a renewed resurgence in pharmaceutical exports in September means that overall exports, and hence GDP, will increase sharply in 2025. In the first nine months of the year, these increased by 11.8 per cent and 15.8 per cent respectively.

Headline and core inflation have increased in recent months with services making the largest contribution. HICP inflation is now expected to average 2 per cent per annum out to 2028. Headline HICP increased, on a year-on-year basis, by 3.1 per cent in November, with core inflation rising to 2.6 per cent in October. The equivalent outturns for August were 1.9 per cent and 1.5 per cent. The recent increase in inflation is largely explained by a pick-up in services inflation. Trend services inflation appears to have settled into a persistently higher phase post‑Covid, at around 3 per cent, and higher than any period since 2007. This is occurring even though construction - typically a lower‑productivity sector - accounts for only 5.5 per cent of output in domestically dominated sectors, compared with 10 per cent in 2007. The more domestic activity relies on lower‑productivity sectors, the greater the risk of higher inflation, underscoring the need for careful macroeconomic management of the necessary expansion in construction activity to deliver on infrastructure and housing needs, and for actions to improve the productivity of the sector itself.

With potential upside possibilities to growth being restricted, the overall balance of risk to the forecast for economic growth is tilted to the downside. These downside risks include the potential for an escalation of global trade tensions and delays in relieving infrastructural deficits, both of which would reduce growth below the central forecast.

The balance of risks to the inflation outlook have shifted from being broadly balanced to being primarily to the upside. Despite cooling, the labour market remains relatively robust with unemployment forecast to remain close to 5 per cent. In such circumstances, stronger nominal wage growth and domestic demand could lead services inflation to be higher than expected. Bottlenecks in housing supply and high construction costs may continue to push up rents and housing-related inflation, which in turn could contribute to upward pressure on wages and goods prices. At the same time, in the absence of significant increases in construction sector productivity, the additional share of economic activity envisaged for this sector would see overall productivity in the economy be lower than would otherwise be the case, which in turn could amplify increases in unit labour costs and their pass-through to inflationary pressures.  Any renewed spike in global energy or food prices due to geopolitical tensions could provide another source of additional inflationary pressures. Against that, a stronger euro or a slowdown in government expenditure growth could lessen inflationary pressures.

 If infrastructure and housing needs are met at the scale envisaged in our forecast to 2028, domestic demand should retain momentum. Sustaining, if not prudently increasing that momentum requires careful macroeconomic management, including implementing structural reforms that reduce delays in delivering enabling infrastructure and maximising the use of available, serviced land for housing in areas of high demand. Recent initiatives such as the Accelerating Infrastructure Action Plan are welcome in that respect. Supporting appropriate technology adoption in delivering housing output will boost productivity and limit the ultimate labour demand in a construction sector that needs to expand. A forward-thinking approach to migration and measures to increase participation among older workers can help align technological progress and demographic change with sustainable, long‑term improvements in living standards.

An important element of prudent macroeconomic management is for fiscal policy to keep a sustainable medium-term orientation, anchoring expenditure growth to the economy’s sustainable revenue-raising ability, reducing the underlying general government deficit (excluding excess corporation tax), and improving the stability of the tax base by broadening it and reducing concentration risk.  Doing so will create both the fiscal and economic space for the necessary rise in public and private investment.