Modified domestic demand to grow by almost 4%, says Central Bank

The Central Bank said its improved domestic growth outlook was based on more positive momentum in investment

Given Ireland's location as a major hub for high-demand pharma production, the regulator said greater volatility in headline gross domestic product (GDP) is expected as a result of changing pricing policies across the sector. 

The Irish economy demonstrated resilience in 2025 despite notable challenges throughout the year, with continued adaptation among multinationals reliant on global trade resulting in a benign adjustment for Ireland, the Central Bank has said. 

Publishing its latest quarterly bulletin, the regulator said domestic activity signals remained 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," the Central Bank said.

Given Ireland's location as a major hub for high-demand pharma production, the regulator said greater volatility in headline gross domestic product (GDP) is expected as a result of changing pricing policies across the sector. 

It also warned that changes in global trade dynamics could alter the pattern of the volume and value of activity in Ireland, which could have knock-in effects on profitability and corporation tax revenue. 

Meanwhile, the Central Bank said Ireland's tech sector, another industry with a major presence here, is both enabling and being transformed by rapid advances in AI, adding that both the sector and the wider economy could benefit sustainably from this advancement which 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," the regulator said.

"Yet developments in the domestically-oriented economy and indigenous exporters are decisive for long‑term, sustainable growth in employment and living standards," it added, noting that gauging domestic performance was challenging given frequent revisions to national data and the influence of multinational investment on even "modified" activity measures. 

Modified domestic demand

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, the Central Bank said overall modified domestic demand (MDD), which measures the underlying performance of the domestic economy and strips out multinational activity, is projected to grow by just below 4% in 2025. 

From 2026 to 2028, MDD is forecast to grow at an annual average rate of 2.9% per year, the Central Bank added, marking an upward revision to the projections for 2026 and 2027 from its last quarterly bulletin. The regulator said the improved outlook was largely due to an upward revision to the forecast for modified investment. 

Despite the improved outlook, the projections envisage a slowdown in MDD growth from the 6.1% annual average realised outturn from 2021 to 2024. The projected slowdown in growth is informed by a number of considerations, the Central Bank noted, citing the rapid growth in employment and incomes that underpinned consumer spending since 2021 which is now expected to continue to moderate. 

In addition, the cooler labour market is expected to see employment growth easing to below 2%, while the unemployment rate is expected to average 5%. Average wage growth is also forecasted to ease from 4.6% this year to 3.5% in 2028. 

However, the Central Bank noted that if infrastructure and housing needs are met at the scale envisaged in our forecast to 2028, domestic demand should retain momentum.