Quarterly Bulletin 2026:2 – Domestic resilience even as inflation rises, but effects of the Middle East conflict hang over the outlook

• Inflation forecasts have been revised upwards notably, to 3.5 per cent this year and 2.9 per cent in 2027
• Weaker consumer spending expected in 2026 but continued growth in MDD is projected over the forecast horizon with MNE-related investment playing a prominent role
• GDP fell sharply in the first quarter of 2026, highlighting its sensitivity to the (onshore and offshore) activities of a small number of multinational enterprises
• A swift resolution to the conflict would see oil and gas prices fall below baseline assumptions, supporting modestly stronger MDD growth and lower inflation than in the central forecast.

The Central Bank has today (18 June 2026) published its second Quarterly Bulletin of 2026. At the launch of the Quarterly Bulletin, Robert Kelly, Director of Economics and Statistics said: “The global economy continues to face challenges and heightened uncertainty arising from the conflict in the Middle East. With the disruption in the Strait of Hormuz continuing into its fourth month, despite news of a resolution, uncertainty remains.”

“Even when the conflict is fully resolved the restoration of supply chains will take an extended period. Accordingly, there has been exceptional volatility in spot prices for oil alongside related commodities and more persistent challenges to supply leading to a higher outlook for energy prices generally than at the time of our March forecasts. For Ireland, higher energy costs are eroding household real incomes and damping consumer confidence, while also feeding through to broader inflationary pressures. The conflict poses complex risks to global supply chains beyond energy, with potential downstream effects on production costs and economic activity. Against this backdrop, domestic economic policy faces the dual challenge of supporting those most vulnerable and enabling households and firms build resilience to these shocks generally, while avoiding measures that unnecessarily add to demand or entrench inflationary pressures within the economy.”

These developments have led to changes to the economic outlook that prevailed before the conflict, with somewhat divergent views on consumer spending and business investment. Modified domestic demand (MDD) growth is projected to moderate, reflecting the damping effects of higher energy prices on real incomes and consumption. However, the momentum in MNE-led investment is expected to be significant in contributing to overall MDD growth over the forecast horizon.

Against this uncertain backdrop, the preliminary National Accounts data for Q1 2026 epitomised the dual nature of the Irish economy. MDD grew strongly, heavily influenced by multinational-dominated investment, particularly in AI and data centre-related capital goods. In contrast, headline GDP contracted sharply during the quarter, reflecting base effects from the volatile swings in exports of polypeptide hormones last year and a contraction in offshore goods trade. These divergences underscore the necessity of looking beyond headline measures to understand underlying momentum in the domestic economy.

Inflation forecasts have been revised upward notably: 3.5 per cent in 2026 and 2.9 per cent in 2027 under the baseline, with energy prices the primary driver. The outlook for energy prices is substantially higher than assumed in the March Bulletin and a range of outcomes are possibly given ongoing geopolitical uncertainty. In a severe scenario assuming higher and more persistent global energy prices, inflation could approach 5 per cent in 2027, while a swift resolution to the conflict could bring it slightly below the 2.9 per cent projected in the baseline.

Direct energy price effects are clearly visible in headline inflation. Indirect effects are also evident, as higher energy costs feed into production costs, transport, and prices for energy-intensive goods and services. Services inflation has remained elevated. The key risk is second-round effects — workers seeking nominal wage increases to compensate for real income losses, and firms passing these higher labour costs into consumer prices. While no widespread evidence of such effects has emerged, the risk remains significant.

The unemployment rate has increased over the past year with forecasted rates above 5 per cent for the first time since 2021. The seasonally-adjusted unemployment rate in Q1 2026 measured 5 per cent, up from 4.6 per cent in Q4 2025 and the highest level since Q4 2021. This increase would have been larger if not for a decline in labour force participation amongst 15-24 year olds as those leaving employment moved out of the labour force rather than into unemployment . This pattern is consistent with seasonal fluctuations in the youth labour market activity as participation rates typically peak in Q2 and Q3 as younger cohorts seek summer employment. These movements are expected to add to aggregate employment growth in 2026 despite the weak Q1 outturn.

GDP fell by 17.1 (12.1) per cent year-on-year (quarter on quarter) in 2026 Q1, driven by a sharp drop in both polypeptide-hormone exports and net trade related to offshore goods. This was a significant negative surprise relative to the flash estimate of a 6 per cent (year-on-year) decline released by the CSO in April 2026. The reasons for the decline are concentrated in the pharmaceutical sector, in particular, a sharp drop in both cross-border goods exports (which were exceptionally large in the first quarter of 2025, partly due to a frontloading effect from expected tariffs) and MNE-related offshore net trade. The former is driven by the dynamics of exports of polypeptide hormones, a key component of weight-loss drugs, which were extremely volatile through 2025. Global demand for these products produced in Ireland is expected to be solid over the medium term.

ENDS

Further information -

The Bulletin presents a baseline forecast alongside three alternative scenarios to reflect the exceptional uncertainty around the outlook:

Milder scenario: A swift resolution to the conflict would see oil and gas prices fall below baseline assumptions, supporting modestly stronger MDD growth and lower inflation than the 2.9 per cent baseline forecast for 2027.

Adverse scenario: In the adverse scenario, global oil and gas prices rise by 10 and 14 per cent, respectively, above the baseline in 2026, with prices remaining persistently higher than the baseline out to the end of 2028. In the this scenario, inflation would increase by 0.3 percentage points above the baseline projection and MDD growth would be 0.2 percentage points lower in 2026.

Severe scenario: In the severe scenario, the equivalent increases in oil and gas prices above the baseline in 2026 are 32 and 63 per cent, respectively. Persistently higher energy and food commodity prices could push inflation toward 5 per cent in 2027 while significantly slowing growth. Broader global supply chain disruptions — including sharp price increases in fertilisers and helium, a critical semiconductor input — pose further downstream risks not fully captured in these scenarios.

Signed article info –

Today, we are publishing a Signed Article (PDF 1.01MB) that assesses the medium-term outlook for the public finances. The analysis finds that the headline and underlying (excluding windfall CT) budget balances are forecast to deteriorate out to 2030, with a lower proportion of estimated windfall corporation tax being saved. Continued spending overruns would further deplete fiscal buffers, with the underlying deficit deteriorating to 6 per cent of GNI* (or €25.7 billion) by 2030, adding to inflationary pressures and limiting the government’s capacity to respond to future negative shocks. While expenditure has increased significantly, the tax base has become more dependent on uncertain corporation tax (CT) and needs to be broadened to finance the substantial increases in future age-related spending and to mitigate the risk from a potential loss of corporation tax. The planned increases in government capital spending can alleviate bottlenecks and boost long-term growth, but effective implementation is needed to maximise these gains. An effective fiscal anchor would help to prevent overheating during periods of strong demand and high inflation, while enabling supportive fiscal policy during downturns, thereby lessening the risk of repeated boom-bust cycles.

Further information

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