The Irish Economic Outlook: Resilience in Uncertain Times

Join Jane Kavanagh from AIB's Corporate Treasury desk alongside David McNamara, Chief Economist, for this latest edition of AIB Market Talk. Using AIB's latest Irish Economic Outlook as the foundation, Jane and David unpack the key insights, exploring the global backdrop and the risks shaping growth, inflation and consumer behaviour in the year ahead.

In this episode the panel discusses:

• Global resilience entering 2026, supported by strong performance, modest tariffs, and on-going AI-led investment
• Shifts in the outlook driven by geopolitical tension, particularly in the Middle East, and implications for oil and inflation
• Ireland's performance, with volatile GDP driven by exports and stronger focus on underlying domestic demand
• Growth outlook moderating but remaining resilient, supported by a still-strong labour market
• Inflation expected to rise to 4%, driven by energy costs but well below 2022 peaks
• High exposure to energy shocks due to reliance on imported fossil fuels, highlighting need for long-term resilience
• Consumer spending still growing, but with increasing caution as inflation impacts disposable income
• Labour market remaining robust, with slower job growth and emerging signs of AI-related shifts
• Housing and investment outlook improving, supported by government policy, though supply remains below demand
• Overall outlook remains resilient, with strong public finances and economic fundamentals despite uncertainty

Read the AIB Irish Economic Outlook here: Irish Economic Outlook May 2026

Visit our website and subscribe to receive AIB's Economic Analysis direct to your inbox. Our full legal disclaimer can be viewed here https://aib.ie/fxcentre/podcast-disclaimer.

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Transcript

SPEAKER_00 0:04

You are listening to AIB Market Talk, bringing you financial market insights from AIB's experts.

SPEAKER_01 0:11

Welcome to our AIB Market update, which we are recording today on the 13th of May 2026. I'm Jane Kavner from our corporate treasury desk, and on the release of the latest publication, AIB's Irish Economic Outlook, I am pleased to be joined by AIB's chief economist, David McNamara, to talk us through his analysis and takeaways. David, before we look forward, we might look to how the year started, I suppose, and to the global backdrop first for 2026 actually started in a surprisingly strong footing.

SPEAKER_02 0:38

I think so. But you know, the economy has performed very well in the last 12 months. And we've talked about this on the on the podcast before, Jane, where, you know, we were all very worried about tariffs last year coming from the US. They did escalate, but not to the extent that we expected. And in fact, if you look at the average tariff on Irish goods, it's it's around one or two percent. So it's very, very low. So we've we've escaped the worst of the tariffs. And the economy in general globally has been very resilient. And it's been boosted by factors like AI. So there's a there's an investment cycle happening, not just by the big hyperscatters in the US and China, but by uh companies across the world, including Europe, investing and deploying the technology, and that's having positive spillovers to the global economy. However, things change very uh dramatically uh around the turn of obviously February into March. So I think we can go into that in more detail. But I would characterize the economy up to that point as actually quite resilient to quite strong.

SPEAKER_01 1:31

Great. And then, Dave, bring it back to Ireland then, what is GDP telling us about how Ireland is performing in all of this?

SPEAKER_02 1:40

It's incredibly volatile. GDP rose over 12% last year. Um, we can go into our forecast for the coming years. Um, so very volatile. It doesn't tell you much, but actually over the past year it has been telling us something very interesting about the global economy. Number one, uh the front running of tariffs, so exporters trying to get as much product out the door as quickly as possible to the US. But number two, we're seeing the emergence in Ireland of the global of I suppose a node in the global supply chain of weight loss drug production. And that was the big driver of our exports, uh, particularly Eli Lilly, who are based in Ireland, uh manufacturing um their products down in Cork, exporting back to the US market. That drove the surge in GDP, but also we're seeing a surge in corporation taxes. So GDP is interesting, but it doesn't tell you much about the domestic economy. Um, we like to forecast and look at modified domestic demand or NDD. Um, and that's been growing at a really strong pace as well over the past few years. And we do expect it to continue to grow steadily in the next few years. And but we we expect a bit of a slowdown to come through on the back of that uncertainty created by the Middle East conflict.

SPEAKER_01 2:44

It's incredible the impact the international factors have, like the farmer's side of it, in terms of our overall GDP figure and that surge that we were seeing. So then, David, looking back then on domestic demand and growth sowing, what numbers are you forecasting in this publication then, you know, through 2026 and 2027?

SPEAKER_02 3:04

So we're we're we're still at forecasting growth, Jin. Um, there's a lot of negativity obviously out there and a lot of concern around what might happen with the Middle East and the Straight of Orthodox News. And you know, we're factoring those things into our forecasts. Um, and I should we we're quite transparent up front, and we say our expectation or what underpins our forecast is that this thing starts to unwind uh in the middle of this year. So in Q2. Um so oil prices peak in the coming months and begin to fall back. And we're very we're quite clear in how we lay that out. That's a very big risk, obviously. Things things could uh perform more badly, and we we do lay out what worse looks like in terms of inflation report, and we can come back to that. But our base case is for modified domestic demand to grow by 2.7 percent this year. That's a slowdown from nearly 5% last year, uh, 2.6% growth in 2027. So still very strong growth and robust in the context of the uh European economy, which is struggling to grow at half a percent a year. We expect the labour market, we can come back to that, to continue to grow steadily, unemployment to tick up slightly. So, overall, I would say a slight downward revision to our forecast compared to where we were at this time in November 2025.

SPEAKER_01 4:13

Inflation is a big part uh in these forecasts, I suggest, uh David. So let's talk about inflation and and uh in the current environment and what your thoughts are there.

SPEAKER_02 4:24

So, in terms of inflation, this is obviously the big driver of the downgrade or so to speak in in our growth forecast. Um, if you uh hit economy with inflation, and we've got recent experience of this, you usually see a slowdown in growth because people have uh less uh spending power, for example, uh in terms of consumers, businesses might decide to hold off on investments or hiring. So we think inflation will come through quite quickly, and we've already seen it. Uh to date, inflation spiked to about 3.5% in the last couple of months. We think it will peak around 4% later this year. So when you think about that um peak that we expect, based on oil prices obviously peaking uh in the coming weeks, you know, that's mut well below where we were in 2022 when inflation peaked at 10%. So I've been asked this question quite a bit. Yeah, why? But also, is this like 2022? Um, and our our answer is is no for a couple of reasons. Number one, um, oil prices are up there, absolutely, but gas prices, which were the key source of the pain uh four years ago, uh, in terms of driving electricity prices and heating and everything, it's just nowhere near. They're a fraction of where they were uh four years ago. So that's number one. And number two, the economy is in a very different place today than it was four years ago. The labor market is not as tight or hot or however you want to term it, uh, in terms of the of this there's less job openings, there's less hiring happening by companies. Um, and also inflation heading into that crisis in 2022, the invasion of Ukraine, was already running at five, six percent. Today, inflation started at two and ECB rates are at two. Four years ago they were at zero. So all of those factors feed into our expectation that inflation will rise this year, but it won't peak to the levels we saw before. But we do obviously outline a severe scenario where you know, if things do get worse, if oil prices go to$150 a barrel, if this thing gets out of hand or continues on for a longer period of time, then our that scenario we uh we lay out in the report has inflation getting to six, seven percent. So that would be pretty damaging.

SPEAKER_01 6:19

But but still short, as you say, of the nine and a half percent off peak that we saw in 2022. How does this compare to our European counterparts then?

SPEAKER_02 6:27

I think we'd probably be above our European counterparts. It's an interesting question because the Irish economy has been performing very strongly, and actually, inflation was a little bit above target uh at the at the turn of the year. We're kind of around two and a half to three percent for all those reasons that the economy is growing very strongly. You've got shortages in terms of housing and other areas and infrastructure. All of these factors in an economy running very hot creates inflation. So I think the expectation globally is that inflation will peak around three to three and a half. We think in Ireland it'll be a bit above that at four percent.

SPEAKER_01 6:58

And looking at a f from the green agenda then, would we be more exposed than David to an oil shock compared to say our European counterparts that we were talking about?

SPEAKER_02 7:09

Yes, is the short answer. Um in in our report, we have a theme and focus, which we do every every time. And this looks at, you know, are firstly are we are we looking at a shock like 2022, which I've already said we're not. Um, but secondly, how exposed are we in terms of our our use of fossil fuels or you know, have we transitioned away from them quickly? The good news is we have. We've done a lot, we've reduced our emissions significantly in the last four years and over the last 20 years. But if you look at our energy mix, everything that we uh the energy we need to run our economy and society, 80% of that energy is imported, and over 80% of it is fossil fuel based. So we're very, very exposed. Uh 16% of our energy thereabouts comes from renewables. The European average is 25%. Okay. So even if we got that European average, we don't need to get to Norway levels where huge amount. Uh we could de-risk ourselves significantly. So, what we say in the piece is that, you know, yes, the short-term measures may be needed to support people through a a tight period, but we need to see an actually renewed strategic long-term focus on how do we de-risk ourselves from the next shock? Because these things are coming around every couple of years now. And what what measures can we take uh to de-risk ourselves? Thankfully, we have the fiscal space. So to finish up, most countries in Europe, if you look at market moves in the last few uh couple of months, take Italy, for example, surge in bond yields, the UK, other factors involved there. A lot. They're very exposed on energy imports, but they're also exposed in terms of their debt, the deficit are really high. We are running a very large surplus of nine to ten billion every year. So we have the fiscal firepower to do stuff in the short term, but we also need to take a long-term lens too.

SPEAKER_01 8:50

And as you say, coming from a much more positive space than then than Rebart back in 2022 with the last shock that we had. So it bodes well, shall we say? And then inflation, it kind of goes hand in hand, I suppose, with the consumers. Yeah. What are we spending? Um, or are we actually spending money? What does your report tell us?

SPEAKER_02 9:07

Yeah, well, we mentioned, and the the actually the AIB spend trend report was out this week, earlier this week as well. So I'd recommend people look at that. Um, we can track card spending by AIB customers, which is a huge proportion of the market. And what that's telling us is that growth is still there, it's still quite strong. You know, growth in terms of six to seven percent in nominal terms. Now, if you take off inflation, it's it's a little bit lower. But obviously, people are having to spend more now on the necessities. So fuel, potentially food prices are increasing, um, potentially electricity price prices increasing out in the years. So all of those factors feed in, you know, I mentioned our 4% inflation forecasts. So that means people are are have less to spend on the nice stuff, on the discretionary items. If you look at our PMI surveys on the services side, you can see that kind of hospitality sector not doing as well as other sectors. Those are the types of sectors that might be hit in an inflation shock. And we're starting to see early evidence that consumers in surveys are telling us that they're a little bit concerned. And when they're feeling a bit nervous, they usually save a little bit more and they spend a little bit less. And that's what we're factoring into our forecasts. Having said all that, we still do expect consumer spending to grow um solidly this year, around 2%. And that's that's a decent slowdown from a near 3% pace over the last two years, but it's still decent growth. And it's because of that, you know, the the labor market's still strong, wages are still growing. So people still are, you know, they're they're still getting wage increases, but they're just it's been eroded a little bit by inflation.

SPEAKER_01 10:35

But does the does that figure, David then included mentioned earlier that the figures that you're looking at allow for oil normalizing, shall we say, somewhat in this space? So that that growth figure there of um consumer spending slowing to say 2.9%, does that allow for that pullback in the oil price?

SPEAKER_02 10:53

Yeah, so as I said it at the start, like our forecasts are predicated on this thing start peaking in the middle of this year and starting to geese back. So we, as I said, we've tried to be transparent in terms of every forecaster um is trying to make assumptions, and we will be wrong with some of these things because it's very volatile. Um so I think as long as you're, I suppose, upfront in terms of what the assumptions you make, and then people can make their own judgments on the back of that. And as I said in the piece, we do outline a scenario where inflation is a lot higher, and that would would have a more damaging effect on the economy. And we do say there is obviously a risk as well that this thing drags on for a longer period. Uh, and there is a risk of a of a significant slowdown in the economy. It's not our base case, but I think we have to uh obviously uh admit that the you know things are very uncertain at the minute and it could be a lot worse than we expect.

SPEAKER_01 11:41

Of course, as you say, it's it's really 2022 when things started off as uncertain as this before, that rid as many different factors going against us. Talking then, just bring it back to Ireland's labour market, David, and you know, we heard um a bit about the impact of AI in this space. Um, what are you seeing? Are are we feeling this uh at this point?

SPEAKER_02 12:01

The labour market has been exceptionally strong. Um, there's over the past since the beginning of 2020, we've we've roughly 465,000 more people at work in the country, 20% extra people at work. And so it's just been phenomenal. So that growth cannot continue. Whether you have a shock from the Middle East or not, we always expected that that growth would begin to slow. Now we we think that the the impact of the uncertainty, and we can see it in the survey, will mean that hiring will be a little bit softer. So we do expect jobs growth to slow this year. So last year it was around 2.2%, which is very good growth in the European context. We expect that to slow to around below 2% this year and next year. So pretty, pretty robust growth. But uh in that context, you are seeing, you know, I have been asked the question about, you know, is AI having an impact just yet? And we did have a a very detailed piece in our last outlook, and our conclusion then was that not yet. Now it could obviously have an effect. There is, we have looked at the uh you know, across the the age groups in this report, and what you do see is that actually jobs grow up in younger cohorts, so right up the way up to 35, say, employment growth has been weaker than the older age groups, and that maybe speaks to some of the anecdotal evidence you're hearing about graduates finding it a bit tougher, uh, some of the large companies maybe not hiring to the same extent, maybe speaks to the AI story. Um, but it's very early days, Jane, and it's very difficult, I think, to find any hard day to prove that evidence.

SPEAKER_01 13:26

Early days, it's moving at pace all the same, though, David, isn't it? I think it's probably something we'd be looking towards over the next couple of months. You mentioned 465,000 as as a job increase now. Just as a matter of fact, just what what sectors are we seeing that? Is there specific sectors that's driving that?

SPEAKER_02 13:42

Or it's very interesting. We've uh it's very much white collar. Okay. And I suppose that plays into the worries around AI because you know that the story is AI is coming for white collar jobs. So predominantly in you know, uh the business services types of industries that we work in, financial services, public sector jobs, that's where the the the growth has been. And it has also skewed to higher wage sectors as well. And that's been driving the income tax receipts that the government is receiving. So it's been a very positive story.

SPEAKER_01 14:08

And and we compare favourably as well with our European counterparts in this regard too.

SPEAKER_02 14:12

Absolutely. Um, but but we're seeing very good jobs go across Europe. Yeah, it's been really good for the past few years, but Ireland has obviously been a standout.

SPEAKER_01 14:19

Great. Um, David, just moving on then from the neighbor market. In my last podcast, I spoke with John and Pat. We spoke in detail on the housing and real estate, and it's well worth a listen as well, obviously. And the news there was positive too. So you might share that good news with us as well, if you will.

SPEAKER_02 14:34

Yeah, I think uh John, John and Pat uh went through it in in great detail. So it was a good, really interesting podcast. Feeding into our investment forecast, we do expect uh good investment growth in the next few years. A couple of factors there. The government is spending more on infrastructure, it's also spending a lot more on housing. It has a new housing plan and infrastructure plan. Um the signs are good around housing delivery. Uh strong alternate last year, 36,000 units. We expect that to rise to 39,000 uh this year and get up towards 45,000 by 2028. Now that's still below what the government is targeting, and it's probably still a little bit below demographic demand, which is around 50. But it's an uplift. But it's of course, um, and there's some positive signs. Now, obviously, the risk is if inflation is worse than we expect, you know, you might have uh developers or builders to just decide to pause. Um, and there is some anecdotal evidence out there. So let's see how the data rolls in this year. But I think the policy measures that government has taken in the last year, and I think the momentum we had uh at the end of last year, coming into this year, is really positive. And capital is there, the policy mix is there. So I think um I our expectation is that you will see that go come through in the coming years.

SPEAKER_01 15:41

And as you said, we've the government has some real firepower behind it, you know, to support it at going ahead and in the in in the face of another big energy shock.

SPEAKER_02 15:50

Capital is not an issue in this case. I suppose it's just delivery, is the key.

SPEAKER_01 15:55

Um, David, then just I suppose to to close us out um and summarize the outlook for the Irish economy, what is our takeaway?

SPEAKER_02 16:02

The takeaway is we come into this uh period of uncertainty from a position of stripes. So I think that's the the positive takeaway. There's a lot of uns uncertainty and a doom and gloom out there, and things could be worse than we expect or we hope. But if you compare the Irish economy today to where it was heading into the crisis uh following the invasion of Ukraine or heading into the pandemic in 2020, we're in an even stronger position than we were then. Balance sheets are good, debt is low, savings are high. None of us want to spend more on the essentials, none of us want to spend more on fuel. But if you compare us to our European peers, at the aggregate level, at the economy level, we're in a much stronger, resilient position than most of those countries.

SPEAKER_01 16:45

David, that's that's great. It's great to hear such positive news um from the Irish economy. It's been incredibly informative. As always, the AIB Irish economic outlook will be hot off the press the 14th of May and available in fxcentre.com. As always, to stay up to date with latest market developments, simply subscribe to AIB's Market Talk wherever you get your podcasts.

SPEAKER_00 17:04

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