Bank of Ireland lower growth forecast for 2026 reflects fading export boost and higher energy costs, with stronger rebound predicted for next year.
The Irish economy is expected to remain resilient in the face of rising geopolitical uncertainty in the Middle East, even as higher oil prices and inflation weigh on growth this year.
That’s according to updated forecasts from Bank of Ireland published today (28 April) where the Bank revised down its projection for Irish GDP growth to 1.6%, from a previous estimate of 2.8%.
“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”
Growth is forecast to strengthen again to 3.6% in 2027 supported by recovering investment, a robust labour market and new export capacity in the pharmaceutical sector.
Oil price surge
Conall Mac Coille, chief economist at Bank of Ireland, said that the downgrade for next year reflects the unwinding of temporary factors that boosted exports in 2025, particularly the front-running of US tariffs along with the impact of higher energy prices on household spending.
As he stated last week during a market update, $100 per barrel oil prices are not sufficient to push Ireland into recession.
Bank of Ireland cautioned its projections are based on energy price futures curves towards $75 per barrel, 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.
“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,” Mac Coille said.
“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.”
Risks and opportunities
The Bank said that 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.
The Bank said that 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.
According to Bank of Ireland, 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.
It said that 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.
According to the revised forecast, Ireland’s 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 and 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.
The Bank is leaving its 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% year-on-year, the softest pace in six-years.
Mac Coille expects 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.
Top image: Photo by Ian Simmonds on Unsplash
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