Quarterly Bulletin No. 1 2025

Comment

A significant rise in policy uncertainty in recent months is the most prominent feature informing the current economic outlook. That rise in uncertainty, proportionately large in comparison to available data, centres on the shifts in geoeconomic relationships brought about by the signalled policy stances of the new US Administration, and the prospective responses from other major economies. Widespread announcements and the 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 that which has existed over recent history. 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 the previous Bulletin in December 2024 (Box 1).

The economic exposure of Ireland to a more fragmented trade and investment relationship between the EU and US is significant. Multi-national enterprises (MNEs) operating in Ireland, many of them US-owned, are embedded in global value chains in key sectors such as pharmaceuticals, med-tech and ICT manufacturing and services (Box 2). Irish exports, and the related profits, tax receipts and employment arising from that activity, are intrinsically linked to both US investment, and the import of US services.^[1] Indeed, Ireland has an overall trade deficit with the US given the size of the deficit in services trade outweighs the surplus in goods trade. Approximately half of the value of Irish exports is derived from foreign-sourced inputs, with the US being the most significant source of those inputs, particularly in the largest economic sectors. For example, about 15 per cent of the total value of Ireland’s pharmaceutical exports ultimately derives from inputs imported from the US.

At the same time, almost 20 per cent of the value of Irish exports ultimately goes to the US, although the EU remains the single largest source of final demand for Irish exports. Depending on the specifics, the imposition of tariffs and non-tariff barriers could have a significant effect on the operations of MNEs in Ireland, especially to the extent they alter the relative profitability of the MNE’s Irish activities.

This is even more likely to be the case if trade-related barriers are accompanied by broader tax and industrial policy changes further dis-incentivising investment and activity in Ireland. Such scenarios present the key downside risk to the economic outlook. Even in the absence of specific details or actual policy implementation, the current rapidly shifting environment is increasing uncertainty materially and the negative effects of this are reflected in our current central outlook.

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. There has been a corresponding fall in the structural unemployment rate over time, related also to the diminishing proportion of those who find themselves unemployed remaining so for an extended period. There is also evidence pointing to the job finding rate being structurally higher now than previously due in part to higher levels of educational attainment (Box 3). Such structural forces may limit somewhat the magnitude or persistence of unemployment in response to negative cyclical shocks, relative to what might otherwise have been the case. However, cyclical conditions are easing, with a greater balance between labour demand and labour supply now becoming evident. For the near term outlook, this will continue to be reflected in steady employment growth 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. Still, upside risks to domestic inflation remain, given the persistent infrastructure constraints and the need to manage addressing these in a sustainable manner.

The disinflation process in the euro area overall is well on track, informing the most recent reduction in monetary policy rates by the ECB Governing Council, bringing the Deposit Facility Rate to 2.5 per cent. The Governing Council assesses that monetary policy is becoming meaningfully less restrictive in the euro area. In light of the current high level of uncertainty for the outlook, and in order to fulfil its determination that euro area inflation stabilises at its 2 per cent medium term target, the Governing Council continues to take a meeting-by-meeting and data dependant approach to assessing policy rate decisions.

Structural changes in the labour market, and the economy more generally, are increasingly intersecting with the near-to-medium term outlook. Included in this is the emergence and somewhat rapid adoption of new technologies, such as Generative AI, as part of an ongoing shift towards digitalisation. Understanding the implications of these shifts for the economy, across different sectors and given the relative skills in the labour market is a key policy priority. It has the potential to change the drivers of sustainable growth in living standards in the decades ahead, and how economic activity and inflation respond to various shocks over the near-to-medium term. Research by Central Bank staff shows that professional and personal services (education and healthcare) are amongst the sectors of the Irish economy most exposed to AI adoption, but also where adoption can be seen as complementary to labour input, yielding potential productivity gains (Box 4). Enabling sustainable technological advancement through investment in both physical and human capital and the associated improvements in productivity will be crucial to maintain growth in Irish and broader European living standards over the longer-term.

Funding for such investment comes alongside other priorities. Most notably in the Irish case is that of housing and the supporting infrastructure required to facilitate a significant uplift in housing delivery. While direct public expenditure – appropriately financed - will form part of that solution, other sources of capital will be needed. One such source could be the significant stock of household savings in Ireland, and indeed in Europe more generally that could be catalysed. In the Irish case, evidence suggests that the household savings ratio – the proportion of households disposable income not consumed – is on a gradual upward trend as the demographic characteristics and related preferences of the population change (Boyd, Byrne and McIndoe-Calder, 2025). There is also a related change in the composition of household savings, with an increasing potential for investments in non-deposit financial assets, which in turn opens up opportunities for alternative funding streams for Irish and other businesses to the forefront of delivering infrastructure in housing, energy, water, transport and technology. An important enabling measure would be achieving progress on Savings and Investment Union (SIU) to provide improved opportunities for households in Ireland (and across the EU) to increase the returns on their savings and provide businesses with a greater choice of funding.

With respect to housing, however, in order to unlock such potential requires a more investable and sustainable construction sector, where housing that is affordable for renters and buyers alike is delivered at viable cost. Making residential development a more investable sector can be facilitated by (1) incentivising more productivity, scale and modern methods of construction in the sector, (2) incentivising the most active use of available land for residential purposes and, (3) maximising the available land for residential construction through adequate public infrastructure delivery and a more effective planning regime, especially in urban areas.^[2]

Outside the housing area – where high levels of public expenditure are already committed – there are increased demands on the public finances for capital expenditure in energy, water and transport to sustainably facilitate more housing and commercial activity while meeting climate-related targets. Additional spending on defence and security are also likely given the emerging geopolitical priorities in Europe. Alongside this are the growing pressures on day-to-day (current) government spending from the ageing of the population, and the known increasing costs of maintaining existing levels of public services. Managing expenditure within budget has also been challenging in recent years, and a pattern of actual government expenditure exceeding initial budget-day plans has become established (see Box 6). On the revenue side, the public finances have benefitted from surging corporation tax receipts in recent years, the majority disconnected from domestic economic activity and drawn from a very concentrated and narrow base. Part of these windfall gains have been diverted to the long-term savings funds, but they have also enabled governments to increase current and capital expenditure without the need to consider discretionary increases in taxation. The realisation of the substantial geoeconomic risks facing the economy are most acute in the vulnerability of the public finances, and underscore the need for considered action. These demands and challenges emerge as the supply-side of the economy remains relatively constrained and an increase in public and private investment is appropriate but needs to be achieved without exacerbating any inflationary pressures. Consequently in order to maintain an appropriate fiscal stance and build long-term resilience in the public finances and the economy, public policy needs a clear orientation. 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 overall investment that are needed to alleviate capacity constraints, boost competitiveness and improve overall living standards.

Outlook for the Irish Economy

Recent Developments and Forecast Summary

Economic activity grew at a solid pace in 2024, though signs have emerged of a plateauing of labour demand and there has been an uptick in headline inflation driven by services and energy in the latter part of the year. Economic activity (Modified Domestic Demand) expanded by 1.3 per cent in Q4 2024 compared to the same quarter in 2023, resulting in overall growth of 2.7 per cent for the year as a whole, a similar pace of expansion as in 2023 (2.6 per cent) (Figure 1 and Figure 4). The growth in activity was relatively broad-based with both consumer spending and modified investment contributing to the expansion in domestic demand during the year. Supporting the former, retail sales, which were muted in the first three quarters of the year, rebounded in November and December. Modified investment was largely driven by growth in modified intangibles (which includes for example expenditure by firms in Ireland on research and development and computer software), as 2024 housing completions came in lower than anticipated. Having contracted in 2023, merchandise exports recovered strongly in 2024 with exports of chemicals and related products and semiconductors both increasing (by 15 and 44 per cent respectively). Government spending contributed significantly to growth in 2024. On the output side of the accounts, activity in the domestically-oriented sectors expanded by 2.1 per cent in 2024 with output in the MNE-dominated sectors contracting by 0.9 per cent. The pace of growth in the domestically-dominated sectors weakened somewhat as the year progressed. Summarising the information from the latest high-frequency monthly data, the Central Bank Business Cycle Indicator (BCI) turned negative in January having been consistently positive over the second half of 2024 (Figure 2). A negative reading for the BCI indicates that the pace of growth in domestic economic activity is lower than its long-run average (2000 to 2024). The slowdown in the BCI in January mainly reflects renewed weakness in retail sales, which contracted by 1.5 per cent compared to December in volume terms and by 0.3 per cent on a year-on-year basis. A weak outturn for the volume of traditional sector output (down 2.6 per cent year-on-year in January) has also contributed negatively to the BCI in January. Partially offsetting this, there were positive contributions to the BCI from PMIs, tax revenue, and housing activity. Employment grew by 2.7 per cent in 2024, and while unemployment remains low at 4.3 per cent in Q4 2024, labour demand showed signs of plateauing between November 2024 and January 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 (Figure 4), marginally below its long-run estimated potential rate. These projections mark a downward revision to the outlook from the last Bulletin in December 2024. 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 (Boyd, Byrne & McIndoe-Calder, 2025). 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. Putting together the forecasts for domestic economic activity and net trade, overall Gross Domestic Product (GDP) is forecast to grow by an average of 4 per cent from 2025-2027, alongside a slight narrowing of the modified current account balance. Modified Gross National Income (GNI*) – which removes distortions related to MNE activity that affect GDP – is projected to grow by 2.7 per cent on average in real terms from 2025 to 2027. Growth in GNI* is based on the forecast for modified domestic demand as well as continued improvements in net trade based on activity that takes place in Ireland. The latter in turn underpins the projections for the modified current account surplus.

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 (Box 2), 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. The baseline outlook has been revised down in this Bulletin compared to the December projections on account of the heightened policy uncertainty observed recently, which of itself is expected to weigh on economic activity to a degree. Should further evidence of trade tensions or a widespread increase in tariffs begin to emerge, then the outlook for the Irish economy would be weaker than in the current baseline forecast. 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.

Forecast Detail

External Environment

The global economy is characterised by elevated uncertainty, stemming primarily from rising trade and geopolitical tensions. The assumptions for the international economy underpinning the central projections in this Bulletin remain broadly favourable (Table 2) but are subject to heightened levels of uncertainty. US growth was seen as resilient, supported by continued strength in consumer demand, but sentiment has rapidly deteriorated in recent weeks. Meanwhile, China faces subdued demand and disinflationary pressures domestically despite continued strength in its export performance. The volatile nature and large impact of potential US trade policy announcements, particularly in terms of the imposition of large tariffs, means that these assumptions come with very high levels of uncertainty. While tariffs would have significant repercussions on international trade, and on the euro area economy as a result, their extent and scope, as well as secondary impacts through potential retaliation, or the fiscal implications of increased defence spending in Europe, remain largely unknown. This is especially the case for their potential impact on euro area inflation. There are upside risks to US inflation, potentially leading to increasing gaps in interest rates vis-à-vis other advanced economies and downward risks to growth in targeted economies, including the euro area and Ireland, as well as the US itself.

The March ECB staff macroeconomic projections for the euro area foresee GDP growth of 0.9 per cent, 1.2 per cent and 1.3 per cent in 2025, 2026 and 2027, respectively. Euro area headline inflation is expected to remain above 2 per cent through 2025 (2.3 per cent) and is project to be 1.9 per cent and 2.0 per cent in 2026 and 2027, respectively. The ECB Governing Council (GC) decided in March to reduce the three key ECB interest rates by 25 basis points, with the deposit facility rate now standing at 2.5 per cent. This was the sixth 25 basis-point rate cut since a peak in rates in September 2023, and the fifth consecutive reduction. The GC sees the disinflationary process as well on track for inflation to reach the 2 per cent target in the medium term, but it will maintain a data-dependent and meeting-by-meeting approach for upcoming decisions. Overall weighted external demand for Irish exports is projected to grow by an average of 2.9 per cent per year between 2025 and 2027. The projected growth in foreign demand – particularly from other euro area countries – is below its long-run average, reflecting the subdued recovery of economic activity in recent years and the impact of recent increases in policy uncertainty embedded in the global assumptions.

Economic Activity

Modest consumption growth is expected in the medium term, as a gradual rise in the household savings rate is assumed to limit the boost to spending from the projected growth in real incomes (Figure 6). Lower inflation, combined with sustained nominal wage growth is expected to be the primary driver of consumption over the projection horizon. Gradually slowing employment growth partly offset by real wage gains will result in consumption growth easing towards 2 per cent in 2027. An increase in economic uncertainty is assumed to weigh slightly on consumption in 2025 and to a lesser degree in 2026 and 2027, contributing to small downward revisions relative to the previous forecast. A continued high rate of household savings (Figure 6) is subduing consumer spending relative to what might previously have been expected given the rise in real incomes, a pattern that is expected to persist over the forecast horizon. The relatively elevated level of household savings in comparison to previous periods of similar economic growth is driven by demographics and higher rates of precautionary saving (Boyd, Byrne & McIndoe-Calder, 2025).

Recent consumption outturns have been more modest than expected at the time of the last Bulletin. Consumption in 2024 was weaker than projected in QB4 2024, consistent with a lower than forecast outturn for employee compensation (CPE) which in turn reduces the estimate for growth in overall disposable income last year. In recent years, there has been upward revisions to both CPE and consumption when the initial CSO estimates for the previous year (published in March of the current year) are compared to the final CSO outturn (published in June) (Figure 7). If this pattern is repeated for the final 2024 outturn, it would imply stronger consumer spending up to the end of 2024 than reflected in the current data. Retail sales, which were muted in the first three quarters of the year, rebounded strongly in November and December. Other high frequency indicators also implied robust momentum in the second half of 2024, with the combined nominal value of card payments and cash withdrawals increasing by 9.4 per cent on average in June – December 2024 compared with a year previously. Consumer sentiment, having recovered from lows related to the pandemic and the inflation pressures arising from the rise in energy prices following the Russian invasion of Ukraine, appears to have stabilised at levels below pre-pandemic (Figure 7 and Boyd, Byrne and McIndoe-Calder, 2025). Retail sales data for January were weak with the volume of sales falling relative to the previous month and in comparison to January 2024. This provides some evidence that the growth in retail activity at the end of 2024 has waned.

Modified investment is forecast to grow at a modest pace over the Bulletin horizon, with a downward revision since the last forecast on account of lower than expected housing completions in 2024 and higher uncertainty in the international environment. Projections for modified investment have been revised downward, to 2.8 per cent on average from 2025 to 2027, from 3.7 per cent in the previous Bulletin. Dwellings remains the largest contributor to modified investment growth over the forecast horizon although completions are forecast to remain well below estimated demand out to 2027. Significant uncertainty remains around the forecast for overall modified investment due to the volatility of modified intangibles and machinery and equipment investment which is dominated by foreign-owned firms (Figure 8). Rising global uncertainty is expected to weigh somewhat on modified M&E, as both multinational firms and trade-exposed indigenous firms may defer investment decisions (see Box 1). Projections for headline investment, which are historically volatile, are, as with modified investment, slightly lower than the previous Bulletin.^[3]

Despite a projected pick-up in housing activity, overall investment is forecast to remain below required levels based on population growth and household formation. Housing completions are forecast to increase to 35,000, 40,000 and 44,000 in 2025, 2026 and 2027, respectively. This represents a downward revision in 2025 and 2026, owning largely to slower momentum in 2024, but a slight upward revision to 2027 in this Bulletin compared to the forecast in December 2024. Underpinning this downward revision is the outturn for dwelling completions for 2024 which came in at 30,330, a drop of 6.7 per cent from 2023, and a weaker outturn than the figure projected in the December Bulletin (32,500) (Figure 10). ^[4] Several factors are restraining housing supply including low productivity in the construction sector, delays in utility connection, delays in planning system and a shortage of zoned and serviced land in high-demand areas. Although housing commencements rose by almost 69,000 units in 2024, there is uncertainty over the proportion of these commencements that are likely to result in completed dwellings in the period out to 2027. Available macroeconomic and financial indicators point to modest machinery and equipment (M&E) growth over the investment horizon. Gross new lending to small and medium enterprises (SMEs) increased in Q3 2024 by 16 per cent year on year (Figure 11), while the latest Bank Lending Survey reported no change in firms demand for loans in Q4 2024 but expected an increase in loan demand in the first quarter of 2025. Firms’ expectations of future demand, which are monitored in Purchasing Managers’ Indices (PMIs), are an important determinant of investment decisions. PMIs from February indicate differences in expected activity between goods and service sectors, with manufacturing new orders and new export orders only just returning to modest positive territory (51.2 and 50 respectively), while service business expectations remain strong (69)^[5]. The projections imply that the overall ratio of modified investment to national income (GNI*) will increase slightly from 17.9 per cent to 18 per cent over the forecast horizon but remain below its long-run (1995 to 2023) average of 22.1 per cent (Table 1).

Gross new lending to SMEs increasing 15 per cent year-on-year

Figure 11

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The outlook for Irish exports through 2027 has been revised downward slightly from the previous Bulletin in light of greater uncertainty about the international environment. Under the assumptions for the central forecast – which only incorporate announced policy measures – exports are expected to grow at just below 5 per cent per year over the forecast period. This growth is projected to be driven by continued expansion in pharmaceutical and ICT services exports, alongside the anticipated modest growth in external demand, which is most important for indigenous Irish exporters. Offsetting the positive sector-specific growth in pharma and ICT, rising uncertainty in global trade is projected to weigh on exports momentum somewhat. Underpinning the export of ICT services is the large stock of Intellectual Property (IP) assets located in Ireland. Import growth is forecast to outpace exports in 2025, before moderating in 2026 and 2027, though uncertainty remains due to the volatility of investment-related imports in the multinational sector.

Pharmaceutical exports, particularly to the US, remain a key driver of overall export growth. Exports grew by 17.9 per cent in year-on-year terms in Q4 of 2024. Services exports rose by 9.2 in Q4 driven by further growth in computer services, though projections for exports of the latter over the forecast horizon have been revised downward since the last bulletin. Recent data show very strong momentum in goods exports, which were approximately 20 per cent higher in the three months to December 2024 than the same period in 2023 (Figure 12). Pharmaceuticals account for three-quarters of overall goods exports and the exceptional growth in recent months has been in large part accounted for by exports of semaglutides to the US – used in the production of weight-loss drugs. Based on previous waves of pharmaceutical exports driven by the life-cycle of specific drugs, this momentum is expected to carry over and support export growth in 2025.^[6] Exports to the US increased by 34 per cent in 2024.

Based on the projections for MDD and net exports, the modified current account of the balance of payments (CA*) is expected to stand at around 3.7 per cent of GNI* over the forecast horizon, though with significant uncertainty. The gap between GNI* and Modified Domestic Demand is projected to narrow slightly, reflecting a slightly smaller contribution from underlying net trade to modified activity in the economy. As a result, the modified current account surplus is forecast to average 3.7 per cent of GNI* from 2025-2027, supported by strong multinational activity.

Inflation

The central forecast is for a further easing of Headline HICP 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 (Table 3). 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. Services year-on-year inflation came in at 3.7 per cent in January, and is expected to be the main positive contributor to headline and core inflation out to 2027. Food price inflation is expected to ease over the forecast horizon, from 3.4 per cent for 2025 to 1.3 per cent by 2027.

A key driver of the inflation projections are commodity price assumptions, which have been revised upward compared with the last Bulletin. Among the energy assumptions, gas prices registered the most significant upward revision compared to previous assumptions used in the December 2024 projections. Similarly, oil prices are assumed to be 4 per cent higher in 2025. European wholesale electricity prices are expected to remain higher throughout the forecast horizon. Higher energy price assumptions reflect recent gas supply disruptions from a key natural gas pipeline between Russia and Europe, combined with increased demand driven by severe cold weather. Additionally, U.S. imposition of a 10 per cent tariff on energy imports from Canada and Mexico has driven energy price futures higher.

The effects of higher assumptions results in an upward revision to headline inflation in 2025 and downward revisions in 2026 and 2027. Additionally, the euro exchange rate against the US Dollar is assumed lower compared with the last Bulletin over the forecast horizon and slightly higher against the pound sterling.

While underlying inflation measures remain below 2 per cent, service and energy prices surprised to the upside in December and January. Underlying inflation measures held largely steady over the past three months at around 2 per cent. While much lower than the high levels reached in recent years, this is considerably above the pre-pandemic level (Figure 14). The largest component of underlying inflation is services, which came in at 3.7 per cent in January, slightly higher than forecast driven by strong price growth in recreation services excluding holiday packages and accommodation (e.g. restaurants, cultural services, hairdressers, among others) as well as housing services (Figure 15). Consumers’ near-term inflation expectations remains steady at 2.9 per cent relative to the previous Bulletin, while perceived inflation continues to decline, but remains above realised HICP at 4.7 per cent. High household expectations or perceptions of inflation can result in continued upward pressure on wages. While rising firm profits were an important driver of price increases in 2022, and to a lesser extent in 2023, higher compensation per hour has been the main driver of inflationary pressures in domestically-driven sectors so far in 2024 (Figure 16).

Labour Market and Earnings

The pace of employment growth is projected to slow but overall labour market conditions are expected to remain tight. Following exceptionally strong employment gains since 2021 (employment rose by 349,000 up to end-2024), the pace of employment growth has slowed recently and a more modest rate of expansion is expected out to 2027. Employment is forecast to increase by 2.2 per cent in 2025, slowing to 1.9 per cent growth in 2027 – well below the 3.4 per cent recorded in 2023 (Table 4). This profile for employment growth is based on the projection for overall economic activity – in particular the central forecast for modified domestic demand, which is for steady growth out to 2027 (Figure 17).

Employment growth is projected to be accompanied by further increases in labour supply from both net inward migration and gains in labour force participation, with unemployment remaining relatively low. Labour force participation is expected to continue to increase over the medium-term supported by age-cohort effects (Figure 19).^[7] These effects helped to lift aggregate participation to 65.8 per cent in 2024. The labour market is increasingly reliant on net inward migration to meet labour demand in certain sectors. The number of permits issued in 2024 was up 8,400 from the previous year, with the average number of permits issued per month being more than three times the pre-pandemic average (Figure 18). The Health and Agriculture sectors were the two largest sectors in which permits were issued. ^[8] Taken together, the projections for employment and the labour force imply that the overall unemployment rate will rise gradually to 4.8 per cent by 2027 as the pace of growth in domestic economic activity slows. Nevertheless, unemployment is forecast to remain low, averaging 4.7 per cent over the forecast horizon. This would mark a continuation of the recent prolonged period of low unemployment with the rate being below 5 per cent for over three years – the longest extended period of low unemployment in the available monthly data back to 1983. Using detailed data from the CSO Labour Force Survey (LFS), Box 3 examines changes in the flows of workers between labour market states (employment, unemployment, inactive) that underpin the period of low headline unemployment observed since 2022.

Despite some signs of easing recently, persistent tight labour market conditions are the main factor underpinning the projection for increases in wages and income out to 2027. There is some evidence of a slight easing of labour market tightness over recent months. On the supply-side of the labour market, the labour under-utilisation rate – a measure of labour market slack (inclusive of unemployed, Potential Additional Labour Force and under-employed) – was slightly higher in 2024 (12.3 per cent) relative to 2023 (11.9 per cent) and 2022 (10.9 per cent), respectively. The headline vacancy rate fell to 1.1 per cent in Q4 2024, its lowest level since Q1 2021. Vacancy-slack measures have increased particularly in sectors such as ICT, Finance and Professional Services, based on analysis of CSO microdata.^[9] As these are the higher-paying sectors relative to the average, the increase in potential labour supply may curb wage pressures at the upper-end of the wage distribution. Labour demand – based on Indeed job postings data – has been flat since Q3 2024. Posted wages picked up in the second half of 2024 with latest data for January 2025 recording a 4.6 per cent increase (Figure 20). These developments suggest that although there are some signs that labour supply and labour demand have aligned more closely in recent months, overall labour market conditions remain tight and supportive of continued growth in nominal wages. Nominal posted wage growth (from Indeed data) averaged 4.3 per cent in 2024, higher than the outturn for nominal compensation per employee (CPE) of 3.5 per cent based on the initial CSO estimate for last year. The final outturn for CPE in 2024 will be published by the CSO in June. Combining these changes in nominal wages with observed inflation, real compensation per employee in 2024 was 4.2 per cent below its 2019 level (Figure 21). However, this reflects a fall in average hours worked rather than hourly earnings with the latter (real earnings per hour) up by 2.6 per cent in 2024 compared to their 2019 average level. Moreover, taking into account non-wage income (net taxes and transfers), real disposable income in 2024 was 4.9 per cent higher than in 2019 (Figure 21). Looking ahead, overall CPE is projected to grow by 4.3 per cent in nominal terms in 2025, which equates to a 1.1 per cent increase in real terms following an initial estimate of a real decline of 0.8 per cent in 2024. The gradual increase in real wages along with changes to the taxation bands from Budget 2025 should also positively contribute to household disposable income which is forecast to rise by 1 per cent on average in real terms from 2025 to 2027 (Figure 22).

Public Finances

An underlying budget deficit is forecast to persist over the forecast horizon as the pace of increase in government expenditure exceeds underlying revenue growth (excluding excess corporation tax). The underlying general government balance (GGB) – which excludes estimates of excess corporation tax and revenue related to the Court of Justice of the EU’s (CJEU) ruling in the Apple state aid case – is projected to run persistent deficits in the coming years (Figure 23). It is estimated to have recorded a deficit of 2.5 per cent of GNI* in 2024, with a further deterioration to 3.3 per cent of GNI* anticipated by 2027 (Table 5). Despite being boosted by the favourable impact of the introduction of BEPS Pillar Two next year, underlying revenue growth is expected to weaken over the medium term as domestic activity and employment growth moderate to levels more in-line with medium term potential. High inflation from 2022 to 2024 boosted nominal growth in consumption and wages, which benefitted VAT and income tax revenues over recent years. This effect will wane over the forecast horizon in line with the expected decline in inflation. Growth in government expenditure is also forecast to weaken in the coming years, but to outpace the increase in underlying revenue (5.8 per cent compared to 4.7 per cent in 2027). This assumes that the cost of living supports introduced in Budget 2025 represent the final version of such measures, and growth in government investment – while remaining elevated - moderates from the exceptional increases of 2022-25 (average growth of 15.4 per cent) as anticipated in the Budget. The headline GGB, by comparison, is projected to continue to run large surpluses over the medium term. The headline GGB is estimated to have recorded a surplus of 7.3 per cent of GNI* in 2024, boosted by the CJEU ruling. As the temporary impact of the ruling dissipates, tax revenue growth is expected to soften and government spending to remain strong, leading to the surplus being forecast to moderate to 2.2 per cent of GNI* at the end of the projection horizon in 2027. This outlook is weaker than in the previous Bulletin reflecting downward revisions to the projections for economic activity.

The general government debt (GGD) ratio is projected to decline to just above 60 per cent of GNI* by the end of the projection horizon (Figure 26). The expected improvement is driven by large primary surpluses – averaging 3.3 per cent per annum - and a continued favourable interest-growth differential (Figure 25). Nominal GNI* growth is expected to average 5.5 per cent per annum over the period 2025-2027, well above the 1.6 per cent projected average effective rate on government debt. The National Treasury Management Agency (NTMA) plans to issue between €6bn and €10bn in bonds this year, with around half of the Government’s funding needs expected to be financed by running down the large cash and other liquid balances at their disposal (€41bn at end January).^[10] The NTMA raised €3bn through the syndicated sale of a new 30-year benchmark bond in January.

Balance of Risks to the Outlook

Deteriorating global economic conditions, potentially resulting from an escalation of geopolitical tensions and geoeconomic fragmentation, imply that risks to the forecast are strongly tilted to the downside. As a small open economy with concentrated sectoral exposures, projections for the Irish economy are contingent on forecasts of global economic conditions, around which there is significant uncertainty. In particular, Ireland’s strong external links to the US mean that changes in its corporation tax policy or trade policy could have significant negative economic effects (see Box 2 and Box D in Q4 2024 Bulletin). While the increase in policy uncertainty has been incorporated into the baseline of the forecast (as described in the Forecast detail and Box 1), the materialisation of risks, whether tariffs or changes in US corporate tax policy, could have much larger impacts. In the short-run, public finances, exports and investment are particularly sensitive to such external conditions, but shocks to these could over time filter into lower wages, employment and consumption. The potential impacts on inflation are unclear, as renewed stress in global supply conditions could put upward pressure on prices for energy and food relative to current assumptions. However, a sharper than expected global economic slowdown may have a negative impact on external and domestic demand for Irish goods and services as well as damping global commodity prices, feeding into weaker than expected growth and inflation. Uncertainty around global financial conditions also introduces uncertainty into forecasts for the balance of payments as the extent of reinvested earnings in Ireland by multinational firms depends significantly on their financing costs and investment strategies.

Ireland’s continued concentrated exposures to foreign multinationals, particularly pharmaceuticals, semi-conductors and ICT services, introduces key sector risk to the forecast. The semi-conductor and pharmaceutical sectors tend to be highly volatile. Activity in the former is concentrated among a small number of firms and is therefore sensitive to the performance of individual firms. A loss of market share or prolonged downturn in the performance of one or more individual firms poses a risk to overall export and import growth in Ireland, with related potential negative implications for employment and tax revenue. On the upside, there is the potential for exports by the pharmaceutical sector to expand further given its late-2024 momentum and that it is currently well placed to take advantage of fast-growing global markets for particular pharmaceutical products (e.g. semaglutides). On the downside, there is the potential that momentum in late-2024 was partly driven by front-loading of exports due to perceived risk of future tariffs. More broadly, MNEs in the manufacturing sector in Ireland have made significant sunk investments in both labour and capital equipment, through investments in high-skilled labour and advanced product-specific technologies. This differs somewhat from the nature of the activity carried out in the MNE-dominated parts of the services sector (such as ICT services) where the required sunk investments tend to be lower. As a result, the activity and employment arising from the MNE-dominated parts of the services sector is likely to be more footloose, and vulnerable to negative shocks.

Worsening domestic-demand vs. supply imbalances present an upside risk to inflation and downside risk to medium-term growth. With the labour market forecast to remain close to full employment and the central forecasts indicating continued, if moderate, growth in the economy, failure to address infrastructure constraints in a timely manner would worsen imbalances between domestic demand and supply. This is the main domestically-driven upside-risk to inflation projections over the medium term in an environment where services inflation is already elevated. The central forecasts are conditional on envisaged productivity growth being realised and growth in demand being met by commensurate increases in supply rather than increases in profit margins, an outcome generally consistent with the outturn data available up to end 2024. Additional fiscal stimulus above existing Government plans would boost domestic demand in the short-term, and with capacity constraints already binding, would lead to upward pressure on house prices and general inflation. Continued pressures from the housing sector (see Q3 2024 QB Signed Article) could also exacerbate precautionary savings. Finally, rising domestic inflationary pressures could worsen Ireland’s competitiveness, dampening exports and growth in the medium run.

Uncertainty about the path of energy prices is an important driver of uncertainty for inflation and consumption. As shown by recent history, sudden geopolitical events can result in significant volatility in energy prices. Sustained high-energy prices pose an upside risk to the inflation outlook, both because of their direct impact and because of spillovers to the prices of goods and services produced by energy-intensive firms. This would in turn erode household real incomes, weighing on consumption growth.

The exposure of the public finances to uncertain corporation tax revenue and a pattern of expenditure overruns represent material downside risks to the fiscal projections. Our forecast does not include any potential additional expenditure above the plans set out in Budget 2025 that could be financed by revenue from the CJEU ruling or recent sales of State owned bank shares. The Programme for Government notes that an early review of the National Development Plan – which will be completed in July 2025 – will utilise State funds, including the Apple Escrow Fund, to support increased capital investment levels. At the same time, expenditure management relative to Budget has been challenging for the past number of years, with overruns averaging €6 billion per annum in the three years to 2024 (Box 5). Should these challenges remain, the path for the underlying GGB would be worse than what is currently included in the forecasts. As noted above, the underlying GGB is already projected to remain in deficit out to 2027 in the central forecast. This reflects the high proportion of corporation tax receipts which are considered ‘excess’ or are not linked to underlying activity in the Irish economy. Recent geopolitical developments emphasise once again the vulnerability of Ireland’s tax base to the decisions of a small number of foreign companies which could result in a loss of excess CT. Moreover, overall tax revenue would be reduced relative to the baseline forecasts in the event of weaker activity in the MNE-dominated sector. This would affect all of the largest revenue sources as foreign-owned multinationals account for around half of income tax and VAT paid by all companies in Ireland and 84 per cent of CT.^[11] The potential negative impact of BEPS Pillar 1 on receipts – if an agreement on this reform is reached – adds an additional layer of risk. Given significant uncertainty over its implementation, the central projections do not include any impact of BEPS Pillar 1. A weaker outturn for the public finances than projected in the central forecast would reduce the government’s ability to finance higher public investment, reducing productivity and prospects for sustainable growth over the medium-term.

Summary Forecast Table

Externally influenced price pressures waned in 2024 with domestically-driven services inflation making the largest contribution to overall price changes, though energy prices surprised on the upside in January 2025. Inflation for energy and non-energy goods was negative through 2024 and food inflation dropped sharply (Figure 3). A range of measures of underlying inflation – stripping out some of these more volatile components – points to inflation stabilising below 2 per cent at the end of 2024. Services inflation remained well above the headline rate in 2024, and ticked up further in January 2025 to just below 4 per cent, reflecting the continued momentum in domestic demand. Supporting relatively strong demand, real average household disposable income grew by 1.9 per cent in 2024.

Quarterly Bulletin No. 1 2025: Boxes

Endnotes

1. See also Box D Geoeconomic risks to the outlook: The possible impact of escalating trade tensions, alternative tariff and tax regimes on the Irish Economy (PDF 527.47KB) in Quarterly Bulletin No. 4, 2024. ↑
2. See Economic Policy Issues in the Irish Housing Market (PDF 1.09MB). ↑
3. An upward revision to assumptions regarding fleet purchases is offsetting the downward revision due to higher uncertainty. ↑
4. Additional factors are also contributing to this downward revision; recent changes in regulations around the PRS sector and apartments sizes; rent caps and limited institutional funding; backlogs at An Bord Pleanala and judicial reviews. ↑
5. A PMI value above 50 signifies growth, while below 50 signals a contraction. ↑
6. The 2018 and 2022 waves (Figure 10) were primarily driven by exports of Cancer drugs and Covid-19 respectively. ↑
7. For example, persons aged 55 years now are more likely to remain in labour force than persons aged 55 years in 1990 due to increased educational attainment amongst other factors. ↑
8. The Critical skills occupations list was updated to include further roles in September 2024 and March 2025. ↑
9. Vacancy-slack data refer to Q3 2024. These sector-specific measures use the number of persons in unemployment or PALF with previous work experience in a given NACE sector as the measure of slack relative to vacancies. ↑
10. Reflecting these transactions, the NTMA project that cash and other liquid assets would total €25.2bn at the end of the year. ↑
11. See Revenue – Corporation Tax, 2023 Payments and 2022 Returns (PDF 1.59MB). ↑
12. ‘Underlying’ General Government Balance excludes estimates of excess corporation tax receipts. ↑
13. Irish Economic Analysis Division ↑
14. Highly uncertain periods are associated with lower economic activity, fuelled by a decline in consumption and postponed investment plans (Leduc, S., & Liu, Z. (2016)). ↑
15. See for example Baker et al, 2016. ↑
16. See Box D Quarterly Bulletin no. 4, 2024. ↑
17. Structural shocks are identified using sign restrictions. ↑
18. The EPU increase is treated as a one-time surge only. ↑
19. Our judgement reflects the cumulative impact of this uncertainty shock over the forecast horizon. ↑
20. Irish Economic Analysis Division. ↑
21. To conduct these decompositions, a substantial amount of research has relied on multi-country input-output (MCIO) tables. MCIO tables map the flows of production, consumption and investment within countries and the flows of international trade between countries, broken down by sector of economic activity and country. ↑
22. “Double counting” in international trade refers to the repeated inclusion of the same economic value in trade statistics, due to intermediate goods crossing borders multiple times as part of global production processes. ↑
23. See Hummels, Ishii and Yi (2001). ↑
24. Only the EU, as a combined region, has a higher share of import content of Irish exports. Combined, both the US and EU account for almost two-thirds of all imported value-added embodied in Irish exports. At 10 per cent, the UK is the only other country that accounts for a double-digit share of foreign value-added content of Irish exports. ↑
25. Over the same period as the ICIO data, these sectors accounted for 8.1 per cent of employment in the Irish economy. ↑
26. Irish Economic Analysis Division. ↑
27. See Governor’s blog “Budget choices and the economy” 19 July 2024. Latest seasonally-adjusted monthly unemployment rate for February 2025 was 3.9 per cent ↑<
28. See Hornstein and Kudlyak (2020) “Why Is Current Unemployment So Low? (PDF 2.47MB)” for a more detailed outline of labour market flow analysis. ↑
29. Labour demand as measured by both CSO EHECS data and Indeed job postings remain above their pre-pandemic levels. ↑
30. See Boyd et al (2022) (PDF 1.08MB) for an analysis of increased female labour force participation in the aftermath of the pandemic. ↑<
31. EU and EN flows between 2008 and 2015 would likely have been higher if not for sharp increases in net outward migration with the unemployment rate likely to have been even higher than the 16.1 per cent peak recorded in 2012. ↑
32. See Conefrey et al (2024) “Long-Term Growth Prospects for the Irish Economy (PDF 1.19MB)” ↑
33. Over the same 2007-2024 period, the share of the labour force with upper secondary or lower education has fallen from 54 per cent to 33 per cent. Higher levels of educational attainment correlate to greater labour force attachment and reduce the likelihood of discouraged workers transitioning to inactivity. ↑
34. There has been relatively little change over the long-run regarding the type of job found once a person transitions from unemployment to employment, Full-time work accounts for approximately 60 per cent of the job-finding rate with part-time employment experiencing relatively no change in employment composition in recent years. ↑
35. Labour hoarding, a feature across many euro area economies, may also be playing a role in the current low unemployment as higher profit margins in recent years have improved the ability of firms to hoard labour in the event of an adverse shock to their economic outlook. See ECB Economic Bulletin (2024) “Higher profit margins have helped firms hoard labour” ↑
36. Research Collaboration Unit. ↑
37. . Williamson, Gannon, Daly, Fitzgerald and Coates, (2024), “Artificial Intelligence: Friend or Foe? An Analysis of How AI Could Impact Ireland’s Labour Market”, Department of Finance and Department of Enterprise, Trade and Employment. ↑
38. . McElheran, K., Li, J. F., Brynjolfsson, E., Kroff, Z., Dinlersoz, E., Foster, L., & Zolas, N. (2024). AI adoption in America: Who, what, and where. Journal of Economics & Management Strategy, 33(2), 375-415. ↑
39. . Kren, J., & Lawless, M. (2024). Firm-level attitudes and actions to the “Twin Transition” challenges of digitalisation and climate change. The Economic and Social Review, 55(1, Spring), 9-39. ↑
40. Irish Economic Analysis Division. ↑
41. We compare the initial ceilings (or allocations) for gross voted Exchequer spending to the actual outturn for spending (as published in the February and December Fiscal Monitors respectively). The February estimate reflects the Revised Estimates for Public Services, published by Government at the end of every year. ↑
42. Housing is used to reference the Department of Housing, Local Government and Heritage. ↑
43. When estimating growth of net core expenditure we only include cost of living measures as ‘non core’ spending in 2023 and 2024, and use the Government’s estimated cost of tax policy changes as published in Budget 2023 and 2024. ↑
44. The material supporting Budget 2024 did not include a forecast of net core expenditure growth. It did, however, forecast gross core expenditure growth of 6.1 per cent which, when coupled with the expected cost of tax measures, results in a net core expenditure projection of 6.2 per cent. ↑
45. Furthermore, when estimates of Covid-19 spending in 2020 are excluded gross voted expenditure was actually below the initial expenditure ceiling that year. ↑
46. We have adjusted end-year spending in the Department of Health in 2023 to take account of the mid-year transfer of its Disability function to the Department of Children, Equality, Disability, Integration and Youth. ↑
47. General government expenditure is a broader definition of spending which includes all arms of Government (other than commercial State-sponsored bodies), including Central Government, Local Government and non-commercial State-sponsored bodies, as well as extra-budgetary funds such as the Social Insurance Fund and National Pensions Reserve Fund, which are managed by agents of Government. ↑
48. Féach freisin Box D Geoeconomic risks to the outlook: The possible impact of escalating trade tensions, alternative tariff and tax regimes on the Irish Economy (PDF 527.47KB) i bhFaisnéis Ráithiúil Uimh. 4, 2024. ↑
49. Féach Economic Policy Issues in the Irish Housing Market (PDF 1.09MB). ↑