Economy shows resilience despite higher inflation and slower growth

EY forecast expects domestic economy to perform solidly in 2026

EY Ireland chief economist Loretta O'Sullivan. The EY Economic Eye Spring forecast expects the domestic economy to perform solidly in 2026 with continued jobs growth and consumer spending, but the challenging backdrop of the Middle East conflict will take its toll.

Ireland's economy is facing higher inflation and slower growth but is well placed to handle global challenges caused by the US and Israeli war on Iran, according to latest predictions from EY.

The EY Economic Eye Spring forecast expects the domestic economy to perform solidly in 2026 with continued jobs growth and consumer spending, but the challenging backdrop of the Middle East conflict will take its toll.

EY predicts that Ireland will experience GDP growth of 1.8% in 2026 and 4.2% in 2027, with Modified Domestic Demand - a measure which excludes large transactions of foreign corporations that do not have a big impact on the domestic economy - is forecast to rise by 2.7% in 2026 and 2.5% in 2027. 

The escalation of the Middle East conflict is sending Irish inflation upwards. EY forecasts that the headline rate will rise from 2.2% last year to 3.1% this year, as the second global energy shock of the decade puts upward pressure on prices. The report says the inflationary shock to date is less severe than that experienced following the invasion of Ukraine. However, energy prices remain a key downside risk to growth.

If 2025 was the year of US tariff uncertainty, then 2026 is the year of global energy volatility," said EY Ireland chief economist Loretta O’Sullivan. "Having navigated the former well, the Irish economy is now being challenged by the latter. Last year saw a very strong performance by the Irish economy, beating all forecasts, and it is only to be expected that this would unwind somewhat in 2026.

"Combined with the impact of the conflict in the Middle East on the global energy market and the world economy, we are projecting more moderate but still decent growth this year, something many of our peer nations will not be expecting."

Labour market remains healthy

The report says the Irish labour market remains healthy, with a record 2.83m people in employment in the fourth quarter of 2025 and income tax receipts indicating that hiring continued in the first quarter of 2026. EY expects employment growth to ease over the forecast period to 1.8% in 2026 and 1.6% in 2027, "reflecting softer economic momentum and more cautious hiring intentions". While the unemployment rate is projected to edge up slightly, it is expected to remain low by historical standards at 5% in 2027.

Household consumption is expected to remain a positive contributor to growth, supported by rising wages and a strong employment base, with EY forecasting growth of 2% this year and 2.3% next year, although higher energy costs and global uncertainty are likely to temper spending decisions. "Consumer spending is a key indicator of the health of the domestic economy and even with the significant energy price impact we are still forecasting this to increase this year and next," said Ms O'Sullivan.

Globally, EY’s latest projections show world growth easing to 2.8% in 2026, from 3.4% in 2025, while Euro area inflation runs ahead of target, averaging 2.8% this year before falling to 2.2% in 2027.

The report says that businesses and policymakers are having to deal with the heightened geopolitical risk, supply chain disruption, and changes in global trade. The report points to vulnerabilities across digital systems, energy markets, and infrastructure capacity, with geopolitical developments increasingly influencing costs, investment decisions, and operational priorities.

"Businesses are navigating conflict on three interlinked fronts, with military, economic, and technological challenges directly shaping commercial and strategic decisions. For organisations, geopolitics is no longer an intangible risk, it’s directly influencing strategy, supply chains, investment, talent and resilience in real time," said EY Ireland head of markets Carol Murphy.

"For leadership teams, the challenge is less about predicting what happens next and more about building the agility and capability to act when conditions change."