Central Bank lowers growth forecast over rising uncertainty

Irish Examiner

9 hours ago

The Irish economy is in a 'little bit of a straitjacket' at the moment, as growth is constrained by issues around housing and infrastructure, officials in the Central Bank of Ireland have warned as it revises downwards its forecast for domestic economic activity due to heightened uncertainty.
In its latest economic bulletin, the Central Bank is now forecasting modified domestic demand - the preferred measure of the domestic economy - to grow by 2% this year and by 2.1% on average between 2026 and 2027.
This is down from the 2.7% forecasted for this year in March by the Central Bank. It also forecasted growth of 2.5% for 2026 and 2.2% for 2027 at the same time.
Robert Kelly, director of economics and statistics at the Central Bank, said with the global economic backdrop continuing to shift 'there is heightened uncertainty on the outlook for the Irish economy'.
He said given Ireland's significant trading and investment relationships with the US and EU, it is experiencing 'the fall-out from changing geo-economic relationships and priorities'.
The Central Bank said that domestic economic activity remained broadly steady in the first quarter of the year and expanded by 1% compared to the same period in 2024.
There was a sharp rise in pharmaceutical exports at the start of the year with merchandise exports surging between January and March by 64% year-on-year, entirely driven by exports to the US. This is expected to fall back during the second half of this year and return to trends seen in the latter half of 2024.
'Little bit of a straitjacket'
On the need for investment in infrastructure more generally, Martin O'Brien, head of Irish economic analysis at the Central Bank, said the economy sort of has this 'little bit of a straitjacket on it at the moment in terms of the level of infrastructure, housing and issues like that'.
"That is a constraint for growth over the medium to longer term... As demand conditions wax and wane, you could see those sorts of pressures, inflationary pressures, or constraints on sustainable growth emerging because of this lower investment,' he said.
In the bulletin, the Central Bank also revised down its housing projections for the coming years. It is now forecasting 32,500, 37,500, and 41,500 homes to be completed this year, next year and in 2027 respectively.
This is a downward revision compared to the forecast in March as a result of completions coming in below expectations during the first three months of the year while commencements also sharply dropped.
'The housing projections are subject to considerable downside risk given current bottlenecks in housing supply and infrastructure,' the bulletin said.
'Increasing productivity in the construction sector is essential to enable it to fulfil the increasing demand for housing and related water, energy, transport, communications and infrastructure. These are immediate constraints on the economy's capacity to grow and to protect Irish living standards broadly and sustainably both now and in the future.'
Investment
On business investment, Mr O'Brien said the outlook is 'not as positive' which might bring some challenges to the medium to longer term prospects of growth in the economy.
"The big element of that is primarily this uncertainty issue. The tariffs do play a part, and they do spill over from the impact on the trade side of the economy.
"But primarily the big change in terms of our outlook is the impact of this heightened level of policy uncertainty that the economy is facing.'
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