Quarterly Bulletin 2025:1 – Unprecedented rise in policy uncertainty due to shift in geoeconomic relationships

• Modified Domestic Demand has had a modest downward revision. It is forecast to grow by 2.7 per cent in 2025 and 2.4 per cent on average in 2026 and 2027
• Headline inflation is projected to rise to 2.2 per cent in 2025 before declining to 2.1 in 2026, and further easing to 1.4 in 2027
• Whilst the outlook is challenged by global events, the domestic economy has for the most part continued to perform well.
  

The Central Bank has today (19 March 2025) published its first Quarterly Bulletin of 2025. On the launch of the Quarterly Bulletin, Robert Kelly, Director of Economics and Statistics said: 

“A significant rise in policy uncertainty in recent months is the most prominent feature of the current economic outlook.  That rise in uncertainty, is proportionately large in comparison to the available data, it centres on the shift in geoeconomic relationships brought on by the signalled policy stances of the new US Administration, and the prospective responses from other major economies.  Widespread announcements and implementation of tariffs and non-tariff barriers, and the need for Europe to evolve geopolitical priorities, present a very different landscape for the Irish economy than we have had in recent years. While our current central forecast for the domestic economy continues to point to a steady pace of growth out to 2027, the shift in policy uncertainty weighs on the outlook for consumption, investment and exports, and leads to the slower growth now expected in comparison to our last outlook issued in December.”

“While the outlook is challenged by global events, the domestic economy has for the most part continued to perform well. This is most evident in the labour market, with the unemployment rate remaining at historical lows over the longest period of time since data are available.  It is expected that steady employment growth will continue alongside growth in wages consistent with productivity developments and contained profit margins.  These combine to underpin our central expectation that domestic inflationary pressures will remain in check over the forecast horizon, despite some near term elevation in energy prices which contribute to a higher forecast for HICP inflation in 2025.“

More elevated economic uncertainty in recent months has prompted a modest downward revision to the outlook. MDD is forecast to grow by 2.7 per cent for the full year in 2025 and by 2.4 per cent per annum on average in 2026 and 2027.  Resilient household consumption is forecast to be the main driver of MDD growth. Continued strength in the labour market is projected to support robust income growth, although its positive effect on consumption will be tempered somewhat by a gradually rising savings rate.  Modified investment, while still contributing significantly to MDD growth over the horizon, is revised down in light of greater global economic policy uncertainty and lower projections for housing completions.  Export growth is also revised down moderately relative to the previous Bulletin based on heightened uncertainty over global trading conditions. Overall export growth of around 5 per cent per year is projected over the forecast horizon. This growth is expected to be supported by a continued expansion in pharmaceutical and ICT services exports but this forecast is sensitive to any further deterioration in global trade including from potential new tariffs.

Households’ real incomes are forecast to continue to rise, supported by further growth in employment and with inflation expected to remain below 2 per cent on average over the forecast horizon. Following exceptional gains since 2022, the pace of employment growth has moderated recently and there is evidence of an increase in measures of available labour supply in some sectors. Despite this closer alignment of labour demand and labour supply, overall conditions remain tight and the unemployment rate is projected to stay close to its current low levels – consistent with an economy near full employment. With inflation forecast to stay below 2 per cent, the favourable labour market conditions are projected to underpin further gains in real incomes. Services are expected to be main driver of inflation over the forecast horizon, though the contribution of energy has been revised upwards on the basis of updated global commodity price assumptions. Continued high levels of net inward migration and increases in labour force participation are forecast to boost labour supply in the coming years.

The central forecast is for a further easing of Headline inflation despite a small upward revision to 2.2 per cent for 2025.  Headline inflation is projected to rise to 2.2 per cent in 2025 before declining to 2.1 in 2026, and further easing to 1.4 in 2027. These projections contain a small upward revision in 2025 followed by downward revisions further in the forecast horizon relative to the previous Bulletin.  The 2025 upward revision is primarily driven by higher energy prices and more persistent than expected services inflation, largely reflecting recent realised data which surprised to the upside and, in the case of the energy price outlook, higher global commodity price assumptions.

Risks to the growth outlook remain firmly to the downside as the risk of more pronounced global trade tensions has risen. As a small open economy with extensive trade and Foreign Direct Investment (FDI) linkages with the US, the Irish economy, public finances and labour market are highly exposed to changes in US economic policy and any broader deterioration in the global trading environment. In the near term and in the absence of any major negative external shock, there is a risk of higher and more persistent inflation unless infrastructure constraints are adequately addressed in a timely manner. This risk would be aggravated if an overly expansionary fiscal stance emerged which created excess demand in the economy. Such an outcome would result in a deterioration in Ireland’s relative international competitiveness.

Given the outlook and risks, public policy needs a clear orientation to build long-term resilience in the economy and the public finances.  In particular, priority should be given to committing to an effective anchor to guide fiscal policy, within the context of that anchor to widen the tax base and prioritise capital expenditure, and to engage in meaningful structural reform to facilitate greater private sector investment.  Taken together these actions would create the necessary fiscal and economic space to sustainably deliver the higher levels of housing and infrastructure investment that are needed to alleviate capacity constraints, boost competitiveness and improve overall living standards.

Previous Quarterly Bulletins are available to view on the Central Bank’s website.