Quarterly Bulletin No.1 2026: Renewed surge in international energy prices tests domestic economic resilience

Renewed surge in international energy prices tests domestic economic resilience

• Higher oil and gas prices are expected to lead to lower growth and higher inflation than previously expected.  The extent is dependent on the duration of the conflict and the scale of damage to critical infrastructure in the Middle East. 
• MDD is forecast to grow by 2.8 per cent per annum on average from 2026 to 2028 in the baseline forecast, with inflation averaging 2.5 per cent per annum over that period.
• More severe energy shock scenario could see inflation going above 4 per cent this year and reducing MMD growth to just above 2 per cent. 

The Central Bank has today (26 March 2026) published its first Quarterly Bulletin of 2026. At the launch of the Quarterly Bulletin, Robert Kelly, Director of Economics and Statistics said: “The recent developments in the Middle East present further challenges for both the Irish and European economies, which were already having to adapt to a shifting geopolitical situation.  The higher oil and gas prices we are seeing are expected to lead to lower growth and higher inflation than we previously anticipated.  The extent of these effects really is dependent on the duration and intensity of the conflict and the scale of damage to critical infrastructure in the Middle East.  These events highlight just how sensitive the Irish economy is to global developments and the need to maintain and build resilience in our domestic economy and public finances. This has become a foremost priority given the reality of a less favourable geoeconomic situation than what has been the norm in recent decades, impacting trade, supply chain security, and investment.”

“Higher energy costs have already been reflected to varying degrees across the price of different fuel types and these are likely to have both direct and indirect effects on inflation facing businesses and households. This recent event in the Middle East, coming just four years after Russia’s invasion of Ukraine and the accompanying sharp rise in gas, oil and food prices, naturally leads to comparisons with that period.  However, as of mid-March the current scale of the initial energy price shock is not as acute, with spot and futures gas and oil prices not persistently reaching the heights of 2022.  At the same time, domestic demand conditions, while still far from weak, are not as buoyant as they were in the post-pandemic surge that coincided with the Russian invasion, potentially reducing the scope for large second-round effects this time.”

“Our baseline forecast uses assumptions derived from market data as of 11 March, but given energy price movements in the meantime and the uncertainty around the outlook, we have looked at a range of possible scenarios in this Bulletin relative to the baseline assumption of a short conflict and a quick restoration of supply-chains.  In the baseline, domestic economic growth is marginally weaker than our previous forecasts for 2026 and 2027, with inflation remaining between 2.5 and 3 per cent in those years. A lengthier conflict with significantly more disruption could see inflation in Ireland being about 1 percentage point higher than that baseline on average over the next three years.”

A large increase in investment underpinned growth in overall Modified Domestic Demand (MDD) in 2025, but signs of a slowdown in economic activity are evident in some other indicators. MDD expanded by 6.7 per cent in Q4 2025 compared to the same quarter in 2024, resulting in overall growth of 4.9 per cent for the year as a whole. There is solid underlying momentum in economic activity from domestic demand and net exports that is consistent with steady growth, but the severity and duration of the conflict in the Middle East hangs over the outlook for inflation and growth. The central forecast is based on an assumed path for oil and gas futures prices as at 11 March 2026. These assumptions capture some of the initial impact of the war on energy prices, with oil and gas prices assumed to be 30 and 57 per cent higher on average in 2026 than in our December forecast. Overall MDD is forecast to grow by 2.8 per cent per annum on average from 2026 to 2028, around half the observed annual average growth rate of 5.9 per cent in the 5 years up to 2025. The central projections are sensitive to the assumed path of energy prices. An escalation of the conflict resulting in higher energy prices, and for a more prolonged period than assumed in the central forecast, would lead to higher inflation and weaker growth.

Driven by higher energy costs, projected inflation has been revised upwards to 2.9 per cent in 2026 and 2.6 per cent in 2027.  Higher inflation has prompted knock-on downward revisions to growth in households’ real disposable income and consumption from 2026 to 2028.  Nominal wage growth is expected to ease back to 3.5 per cent by 2028 which, when combined with other net income and the inflation outlook, sees average household disposable income remaining relatively unchanged over the baseline forecast horizon.

The unemployment rate increased slightly from 4.3 per cent in 2024 to 4.7 per cent in 2025, with wider measures of labour market slack also rising. The pace of employment growth is easing in-line with wider economic developments but is still expected to be just below 2 per cent out to 2028, with unemployment rising just above 5 per cent.  Much of the easing in the labour market has been evident in the experience of younger workers, and to date primarily reflects cyclical norms in more consumer-facing sectors rather than significant structural shifts in labour demand due to technological change. 

While consumer spending may be more constrained considering the higher than previously expected inflation outlook, domestic investment is expected to grow at a steady pace.  This reflects the anticipated delivery of public capital infrastructure, rising housing completions and slightly more momentum in business investment than previously forecast.  However, should higher energy costs become persistent this would alter the relative returns and the viability of some capital expenditure over the forecast horizon.  For housing, some of the benchmark indicators commonly used for forecasting output, such as commencements and PMIs, are less straightforward to interpret than previously, and point to the potential for a less robust rise in housing output than in our current forecast.  Housing completions are forecast to number 40,000, 43,000 and 46,000 in 2026, 2027 and 2028 respectively.  Higher housing output depends to a considerable extent on the delivery of necessary public infrastructure, including the implementation of the Accelerating Infrastructure Action Plan.  This, alongside other measures to attract private investment, is warranted and feasible to achieve, considering the extent of private sector savings and the relatively low rate of investment over the past decade, especially by indigenous businesses.