OECD Economic Outlook, Volume 2025 Issue 1

Ireland

GDP growth is projected to be 3.7% in 2025, before moderating to 2.3% in 2026, as trade fragmentation weighs on export-oriented sectors. On the domestic side, heightened uncertainty will encourage households to save more, despite sustained nominal wage growth underpinned by a tight labour market. Modified domestic demand, which controls for the major distortions arising from the activity of multinationals, is projected to expand by 2.2% in 2025 and 2.1% in 2026, below its long-term average of 2.7%.

As the United States is Ireland’s biggest export market and multinationals play a large role in Irish exports and tax revenues, higher tariffs or non-tariff trade barriers would lower growth and exacerbate medium-term fiscal challenges. Prioritising productivity-enhancing reforms, spending efficiency, and stricter domestic fiscal controls will be key. Planned infrastructure investment should be implemented, albeit properly sequenced to avoid adding to inflation.

The strong labour market shores up the domestic economy

According to preliminary estimates, GDP grew strongly by 3.2% in the first quarter of 2025, mainly reflecting strong exports of pharmaceuticals despite considerable global uncertainty. Amidst persistent population growth, the labour market was robust in early 2025, with strong job creation and low unemployment. After easing considerably in late 2024, headline inflation bounced back to 2.0% in April, driven mostly by food prices, while stronger services price growth pushed core inflation up to 2.4%. Consumer spending rebounded by end-2024, driven by sustained wage growth underpinned by labour shortages. Buoyant VAT revenues indicate ongoing strength in private consumption in early 2025. Going forward, tariff-related uncertainties will weigh on consumer confidence.

Ireland

1. Deflated by the harmonised index of consumer prices.

Source: OECD Economic Outlook 117 database; Central Bank of Ireland “Private Household Credit and Deposits” (dataset); and CSO, “Goods Exports and Imports” (dataset).

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Ireland: Demand, output and prices

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The non-pharma chemical, dairy, and beverage industries are among the sectors directly affected by the 10% tariff on US imports from the EU. An extension of the tariff to currently exempt pharmaceuticals, or a tightening of non-tariff barriers on services trade, could weigh heavily on growth. Exports of pharmaceuticals – largely from US-owned multinationals – to the United States, Ireland’s largest single export market, surged to EUR 44 billion in 2024, out of total goods exports of EUR 73 billion. Multinational-dominated trade with the United States in intellectual property products, computer, and business services accounts for about 25% of Ireland’s services trade.

Public spending pressures are mounting

Looming risks warrant greater fiscal prudence. Underlying tax revenue growth remained strong in early 2025. As Budget 2025 measures – worth 2.0% of 2024 GDP; 3.6% of GNI* – are being rolled out, public spending is surging. In addition to higher public investment and a set of loosely targeted new cost-of-living initiatives, the package includes permanent current spending increases and tax measures to offset income threshold effects. Higher spending and weaker tax revenues due to second-round effects from the 10% tariff on US goods imports from the European Union, and the further extension of reduced VAT rates on electricity and gas to end-October 2025, will lower the budget surplus to 1.3% of GDP (2.2% of GNI*) in 2025. The fiscal stance is slightly expansionary in the projection period, even assuming no income-support measures in 2026. Gross public debt is projected to fall close to 60% of GNI* (36% of GDP) by 2026.

Heightened uncertainties will slow growth

By weighing on consumer and business sentiment in 2025-26, trade policy uncertainty is expected to restrain business investment and household consumption, despite real income gains driven by still resilient nominal wage growth. Hence, modified domestic demand is projected to expand by just over 2% annually through 2026, though GDP growth is projected at 3.7% in 2025 and 2.3% in 2026. Higher input costs and services prices will push headline inflation up to 2.1% in 2025, despite milder energy price pressures, while core inflation will reach 2.3%, before both ease slightly in 2026. Given the key role of a few large foreign-owned multinationals in export-oriented sectors, like pharmaceuticals or advanced computer and business services, higher general or industry-specific tariffs or non-tariff barriers could lower growth and adversely impact fiscal balances. On the upside, manufacturing multinationals’ significant sunk investments in both labour and capital equipment may help mitigate the impact of tariffs on growth. Amid significant skills shortages, the employment correction to the shock might be softened by firms’ reluctance to shed staff.

Tackling infrastructure bottlenecks remains a priority

Higher investment in housing, transport and energy infrastructure is essential to maintain foreign investor confidence and preserve living standards. While tariffs could lower corporate and personal income tax revenues, excess corporate tax receipts should continue to be allocated to the long-term savings funds, which are intended to address ageing-related costs and support medium-term productivity-enhancing investment. Additionally, greater emphasis should be placed on improving spending efficiency – supported by comprehensive spending reviews, stricter domestic fiscal guard-rails, and better-targeted income support where needed. Boosting work incentives in the tax and benefit system, alongside improving the supply of quality vocational pathways for low-skilled workers, could help alleviate labour and skills shortages. Easing SMEs’ access to R&D funding and to tailored lifelong learning programmes, via the National Training Fund, could help foster domestic investment in digitalisation and innovation, and result in more even productivity gains.