Irish economy well placed to weather Middle East uncertainty

  • Despite higher oil prices and geopolitical risks, Ireland expected to remain resilient with growth rebounding in 2027

Tuesday 28 April 2026: Bank of Ireland has revised down its projections for Irish GDP growth in 2026 to 1.6% (2.8% previously), with a rebound to 3.6% growth expected in 2027. This downgrade reflects the unwinding of temporary factors that boosted exports in 2025 (front running of US tariffs) but also the recent uncertainty posed by events in the Middle East. Specifically, Bank of Ireland sees CPI inflation remaining above 3% through the remainder of 2026, restraining consumer spending to a 1.8% expansion this year.

$100pb oil prices not sufficient to push Ireland into recession. Bank of Ireland cautioned its projections are based on energy price futures curves towards $75pb, which imply the disruption to oil supply from the Middle East will be short-lived. Here, investors may be too optimistic. A surge in Brent oil prices could lead to volatility in financial asset prices, exposing a range of vulnerabilities in bond, equity and private credit markets.

Commenting, Conall Mac Coille, Group Chief Economist, Bank of Ireland said: “While the recent rise in oil and energy prices towards $100 per barrel represents an unwelcome squeeze on household real incomes and consumer spending, the Irish economy is expected to show the same resilience demonstrated during Brexit, the Covid‑19 pandemic, and the energy shock that followed Russia’s invasion of Ukraine.

“There are enormous risks – 20% of global oil supply remains cut off. ECB President Christine Lagarde has warned of a cliff-edge as the last ships that left the Middle East before the war finally reach their ports. Financial Stability Board Chair Andrew Bailey has cautioned a loss of investor confidence reminiscent of the GFC could emerge if higher oil prices put pressure on bonds, stretched AI-equity valuations and private credit markets”.

Key Points on new Bank of Ireland forecasts

  • GDP growth revised down to 1.6% in 2026 (vs 2.8% previously).
  • Softer 3.6% export growth this year as front-running of US tariffs in 2025 unwinds
  • CPI inflation of 3.3% in 2026, to restrain consumer spending to 1.8% gain
  • Labour market to remain robust: Employment to expand 1.8% in 2026, with unemployment rate staying low at 4.8%, pay rising by 4%.
  • Homebuilding of 37,500 units in 2026, non-residential construction to rise 6%.
  • Forecast for house price inflation of 4% left unchanged
  • Government surplus of €9bn (2.5% of GNI) in 2026, provides safety buffer for the public finances* should further energy supports be required.

CPI inflation is expected to average 3.3% in 2026, falling back to 2.6% in 2027. Ireland’s 3.6% HICP inflation rate in March was the fifth highest in the euro area, reflecting our exposure to the 63% rise in home heating oil prices, is treble the European average. Here, cuts to excise on petrol/diesel reduced the HICP inflation rate by circa 0.6pp, but these are scheduled to be reversed in August. A key uncertainty is the timing of any increase in household electricity and gas bills. Bank of Ireland has assumed a 10% rise in these prices from Q4 2025 onwards, adding 0.4 percentage points to HICP inflation.

Irish households are well placed to cope in aggregate. The savings ratio remained high at 14% in 2025, household debt continues to fall, and bank deposits stood at €172 billion in February, up 6.3% year on year. While consumer spending growth is now forecast to slow to 1.8% in 2026, rising employment (1.8%) and pay (4%) should will support positive real growth in aggregate household sectors incomes, even after 3.3% CPI inflation. However, clearly many individual households may struggle with higher energy prices.

Investment plans already in place are expected to proceed. Business confidence surveys have shown only a muted negative impact from recent events. Housing completions are forecast to rise to 37,500 in 2026 and 40,000 in 2027, supported by a recovery in non‑residential construction and the planned 17% increase in public capital spending to €19 billion in 2026. The AI-related investment cycle is also helping Ireland.

Revised budget surplus provides an additional safety buffer. The Department of Finance has recently revised up its projection for the general government surplus to €9.2 billion in 2026, 2.5% of GNI*, which will protect the public finances should any further energy prices supports be deemed to be required.

Export sector should demonstrate defensive qualities if global downturn emerges. Concentration in less cyclical industries such as agri‑food, ICT services, pharmaceuticals and medical technology have been a source of stability. Ireland’s lacks heavy engineering, machinery & equipment producing sectors that will be hit first if firms put off investment. While GDP growth in 2026 will be restrained by the unwinding of export front‑loading, new pharmaceutical capacity for weight loss drugs will support growth.

Leaving our forecasts for 4% house price inflation in 2026 unchanged. RPPI inflation was 6.8% in February, but should fall back towards our forecast for 4% through 2026. The Daft (3.7%) and MyHome (4.7%) asking price inflation measures have decelerated and the average mortgage approval in February was €336,500, up just 1.4% yoy, the softest pace in 6-years. Events in the Middle East are unlikely to have a material impact on Irish house prices unless a far more malign macroeconomic context emerges.

In summary, while developments in the Middle East are a clear risk to the outlook, the report concludes Ireland enters this period from a position of economic strength.