Housing, public investment and AI-driven capital spending expected to support growth despite ongoing uncertainty in global energy markets.
Bank of Ireland has revised its economic forecasts for 2026 and 2027, pointing to continued strength in the domestic economy supported by consumer spending, government expenditure, housing activity and investment linked to artificial intelligence (AI).
The Bank expects modified domestic demand, a key measure of underlying economic activity to grow by 3.5% in 2026, while indigenous sector output is forecast to expand by 2.5%.
“It is underappreciated that FDI into Ireland is benefiting on two fronts: from the development of new weight-loss drugs and the AI-driven investment cycle”
At the same time, headline GDP is forecast to contract by 3% this year due to a projected 6.5% decline in multinational sector output.
According to the Bank, this reflects the unwinding of the significant surge in pharmaceutical exports recorded in 2025 ahead of anticipated tariff measures.
Consumer spending remains resilient
Investment is expected to remain a significant driver, supported by an estimated 39,600 housing completions in 2026 and continued AI-related capital expenditure. Machinery and equipment spending rose 17% year-on-year in the first quarter of 2026.
Bank of Ireland has also revised its inflation outlook. Consumer price inflation is now expected to average 3.1% in 2026, down from a previous forecast of 3.3%, reflecting lower oil price assumptions of $86 per barrel. Inflation is forecast to ease to 2.7% in 2027.
Conall Mac Coille, Group Chief Economist at Bank of Ireland, said the inflation outlook continues to be influenced by energy prices and government policy.
“While we have revised down our forecast for CPI inflation to 3.1% in 2026, due to the fall in oil prices, we have actually revised up our projection for 2027 marginally to 2.7%,” Mac Coille said.
“This may seem surprising. Part of the explanation is 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.
“Consumer spending has remained resilient, rising by 2.9% in the year to Q1 2026. Nonetheless, Irish households are still cautious. The household savings ratio was 12.5% in Q1, 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.”
Housing completions
The Bank expects residential construction and public infrastructure spending to remain central to economic growth over the coming years.
“A key feature of Ireland’s economy has been the pace of investment. We expect housing completions to rise to 39,600 this year and 42,000 in 2027. The rollout of the NDP will also help. Euroconstruct expects Ireland will have the fastest-growing construction sector among 19 European countries through 2026–2028, including the fourth-fastest growth in both non-residential construction output and civil engineering activity.”
The Bank continues to forecast house price inflation of around 4% in 2026.
Mortgage approvals increased by 3.5% year-on-year in May to €348,700, broadly in line with earnings growth of 4.4%. Transaction activity also continued to rise, with overall sales increasing 2.9% during the first four months of 2026. New-build transactions were up 17%, while existing home sales declined by 2.7%.
While the Labour Force Survey showed employment falling by 0.6% in the first quarter of 2026 and remaining flat year-on-year, Bank of Ireland believes the figures do not reflect broader labour market conditions.
The Bank notes that full-time employment was still 1.5% higher than a year earlier and points to stronger signals from income tax receipts, payroll data and work permit numbers.
It expects employment growth of 1.1% in 2026 and 1.5% in 2027, with the unemployment rate remaining at 5%.
“It is underappreciated that FDI into Ireland is benefiting on two fronts: from the development of new weight-loss drugs and the AI-driven investment cycle. Eli Lilly and Novo Nordisk have both recently expand their facilities in Ireland. Machinery and equipment spending was up 17% year-on-year in Q1 2026, helped by AI-related investment in data centres. Intel announced a €5bn investment in its Irish plant in response to ongoing demand for semiconductors.”
Risks on the horizon
Exchequer figures for the first half of 2026 showed tax revenues reaching €50 billion, an increase of 4.8% year-on-year. Income tax receipts rose by 6.7%, VAT increased by 7.5% and corporation tax receipts were up 4.7%.
Gross voted expenditure climbed 6.9% to €54.4 billion, including current spending of €48 billion and capital expenditure of €6.3 billion.
Bank of Ireland expects nominal public spending on goods and services to rise by 7.4% during 2026, with public sector output increasing by 4%. The Bank estimates that government activity will contribute 0.8 percentage points to modified domestic demand growth this year.
The Bank said developments in the Middle East continue to represent the principal risk to its outlook.
Its forecasts are based on oil prices averaging $86 per barrel and assume that any disruption to global energy supplies remains temporary. Bank of Ireland noted that recent lower oil prices and expectations of a more gradual path for interest rates have supported the inflation outlook.
While domestic demand, financial markets and AI-related investment continue to provide support for economic activity, the Bank cautioned that changes in geopolitical conditions and energy markets could have significant implications for both Irish and global growth prospects.
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