GDP projected to contract this year driven by multinational sector 

However, domestic economy expected to grow by 3.5%

Bank of Ireland is forecasting house price inflation to slow to about 4% in 2026. File picture

Gross domestic product (GDP) is expected to experience a contraction this year largely due to declines in the multinational-focused sectors, but the domestic economy will see some growth, a new economic analysis by Bank of Ireland has found.

The analysis is forecasting a 3% contraction in GDP this year largely due to a 6.5% contraction in the multinational sector. This reflects the surge in pharmaceutical exports in 2025, ahead of feared tariffs, now unwinding.

The indigenous sector is expected to grow by 2.5%. GDP is expected to grow by 3.6% next year.

GDP is not the preferred measure of Irish economic activity largely due to the heavy influence multinational companies have on the data. Modified domestic demand (MDD) — which strips out the impacts of multinationals — is forecast to grow 3.5% this year and 2.5% next year.

The analysis also forecasts healthy gains this year in consumption, up 2%, Government spending, up 4%, and investment up 6.4%.

Inflation an ongoing concern

Inflation is an ongoing concern for the economy, as oil prices rise again following the resumption of hostilities between the US and Iran. In early July, Brent Crude oil prices — an industry benchmark — hit a low, since the outbreak of the war, of about $70 a barrel.

Oil prices have since increased closer to $90 a barrel.

While the forecast for inflation has actually been revised down for the rest of this year, the forecast for 2027 has actually been revised up marginally to 2.7%.

Group chief economist at Bank of Ireland Conall Mac Coille said part of the explanation was the phased “withdrawal of Government excise duty cuts on petrol”.

“Such is the scale of support that retail petrol and diesel prices in July, at close to €1.70 per litre, were close to the lowest levels recorded over the past five years.” 

Mr Mac Coille said consumer spending had “remained resilient”, increasing by 2.9% during the first quarter of this year.

“Nonetheless, Irish households are still cautious. The household savings ratio was 12.5% in the first quarter, evident in household deposits growing to €175bn in May, up sharply by 5.8% year-on-year. So the household sector is somewhat insulated against the risk of a sudden rise in oil prices,” he said.

Housing

On the issue of housing, Bank of Ireland is forecasting house price inflation to slow to about 4% in 2026. Mortgage approvals rose 3.5% year-on-year in May to €348,700, which it said was “broadly in line with earnings growth of 4.4%, suggesting house prices and incomes are becoming more closely aligned”.

“We expect housing completions to rise to 39,600 this year and 42,000 in 2027. The roll-out of the National Development Plan will also help,” Mr Mac Coille said.

The bank also noted the Government’s exchequer returns for the first half of the year “paint a healthy picture”, with revenues of €50bn, up 4.8% on the year, including strong gains across income taxes, Vat, and corporation tax.

Bank of Ireland said a key judgement underpinning its forecasts was the recent weak labour force survey which showed job creation slowing to zero, and employment falling by 0.6% during the first quarter of this year.

It is forecasting a rebound in the second quarter’s labour force survey but “concerns about the labour market are likely to persist given the high-profile job cuts in the information and communication technology sector and the potential impact of AI”.