Bank of Ireland revises economic outlook for Ireland upwards
· GDP revised up to 8.1%, Modified Domestic Demand revised up to 2.9%
· Strong consumer spending remains despite drop in sentiment
· Risks remain - change to current US policy would see drop in Irish GDP projections
Bank of Ireland’s latest economic forecasts have been revised upwards; for GDP to 8.1% growth (3.5% previously), modified domestic demand to 2.9% (2.8% previously) and employment to 2.6% growth (1.8% previously) in 2025.
The revisions reflect surging exports and multinational output, but also Ireland’s rapid pace of job creation, consumer spending and public expenditure. Investment spending is expected to bounce back in 2025, as a partial rebound in construction activity takes place. The forecasts assume US tariffs on Irish exports remain at 10%, with pharmaceuticals exempt. Any change to current US policy from August 1st, or thereafter, would lead to a revision downwards for Irish GDP projections.
Discussing the revised forecasts, Conall Mac Coille, Chief Economist, Bank of Ireland said:
“The Irish economy has significantly outperformed expectations in the first half of 2025, prompting us to revise our GDP growth forecast to 8.1%, up from 3.5%. This reflects an exceptional surge in multinational output and exports early in 2025, as well as strong momentum in consumer and public spending. Some of this growth reflects firms front-running expecting tariffs, but also new pharmaceutical production facilities coming online.
“Our upwardly revised forecasts also reflect the strong performance of the domestic economy early in 2025. We now expect Modified Domestic Demand to grow 2.9% in 2025. Revisions to CSO data show consumer spending growing at a substantially faster pace (3%) than first thought. Also, public spending in H1 2025 was up 8%, adding to demand. The 3.3% pace of job creation is also ahead of expectations. The big picture is that the economy has so far weathered the uncertainty posed by President Trump’s tariffs and EU-US trade negotiations.
“Clearly the outlook is especially uncertain currently. Our forecasts assume US tariffs on Irish exports remain at 10%, with pharmaceuticals exempt. Any escalation would necessitate a downward revision. We are also concerned by growing evidence that bottlenecks and capacity pressures are not being addressed. The decline in housing completions in 2025 has been well flagged but the 5% contraction in non-residential construction in 2024 (a 5th consecutive year of contraction) reflects further delays in the delivery of infrastructure and the NDP.”
Key points on new Bank of Ireland forecasts:
GDP
Front-loading of exports ahead of US tariffs, new pharmaceutical production facilities and investment in intellectual property assets combined to raise GDP by 7.4% in Q1 2025, up 20% on the year. Some, but not all, of this rise in GDP will unwind through 2025. Hence, we have raised our forecast for Irish GDP growth to 8.1% in 2025 (3.5% previously) following the surge in exports and multinational sector output over the past 12-months.
Modified Domestic Demand - modest upgrade to growth to 2.9% in 2025
Revised CSO data show consumer spending rose 3% in the year to Q1 2025, more momentum than previously thought. Public expenditure was also up 8.2% in H1 to €51bn, a faster pace than assumed in Budget 2025. Investment in homebuilding (-4%) and non-residential construction (-5%) contracted sharply in 2024, but we expect a 5% rebound this year. Hence, our forecast for modified domestic demand is revised up slightly to 2.9% (previously 2.8%)
Employment - Labour market continuing to expand at rapid pace
Job creation has beaten expectations. LFS employment was 2.8 million in Q1 2025, up 3.3% on the year, the unemployment rate 4% in June. We still expect a gradual softening of job creation to 2.6% in calendar year 2025 and 1.4% in 2026, in part due to US tariffs and uncertain global environment, so the unemployment rate rises gradually to average 4.4% next year.
Trade tensions - US tariffs remain the key risk for the Irish economy
Our forecasts are based on US tariff’s remaining at 10%, with pharmaceuticals remaining exempt. Should the US administration follow through on threats to raise tariffs to 30% on August 1st, or impose them on pharmaceuticals we will need to revise down our projections. There is also the risk of escalation. The EU could impose retaliatory measures on the US, tariffs raising Irish import prices. Retaliation could also include utilising the ‘anti-coercion instrument’, targeting US big-tech firms, and potentially hurting Irish services trade.
Ireland’s direct exposure to US tariffs is limited. Goods trade with the US accounted for 9% of Irish exports in 2024, of which three-quarters were pharmaceuticals. However, uncertainty could have a slow-burn negative impact on FDI. However, our Irish economic forecasts embody only a gradual pick-up in investment spending from current subdued levels. We are encouraged by the recent American Chamber of Commerce survey – indicating 60% of respondents still expected to expand employment.
House price inflation - Still expect 5% house price inflation through 2025
Tariff related uncertainty has had little impact on the housing market. We are sticking with our forecast for 5% house price inflation in 2025. Recent indicators clearly point to a ‘mid-single-digit’ rise in Irish house prices, close to the current pace of pay growth at 5.6%. MyHome asking price inflation slowed to 7% in Q2 2025. Also, the average mortgage approval was €337,000 in May, up 6.7% on the year.
Consumer Spending – strong spending despite drop in consumer sentiment
The CSO now estimated consumer spending grew by 3% in the year to Q1 2025 (revised up from 2.5% initially). Credit-debit card spending in June was up 6% on the year. Again, there is no sign of the fall in Irish consumer confidence to a 2-year low in April, affecting actual spending decisions. Hence, we are now forecasting a stronger pace of consumer spending growth in 2025, at 2.7%. Notably, Irish households continue to accumulate savings rapidly. Household deposits grew by 6.5% in the year to May to €165bn.
Investment - A concerning contraction in 2024
The fall in Irish housing completions to 30,300 in 2024 has been well flagged. However, perhaps as concerning was the 5% contraction in non-residential construction, down for a 5th consecutive year. This reflects the negative impact of build cost inflation, planning delays and other rigidities on the construction sector, holding back delivery of key infrastructure projects (such as energy/water) and the National Development Plan. On this measure, investment (the ratio of non-residential construction to GNI*) is now at its lowest level since 1995. This is especially concerning, showing bottlenecks and capacity pressures are not being addressed.
Public spending continuing to run well ahead of Budget 2025 plans
Gross voted public expenditure was €51bn in H1 2025, up 8% on the year. This is well ahead of the 1.7% pace the Department of Finance had forecast in it’s May 2025 Annual Progress Report. Hence, we have raised our projection for real public consumption of goods and services to 3.9% in 2025. We expect gross spending will grow by 7% in 2025. This means the government surplus will still equal 1.2% of GDP in 2025 with the debt/GDP ratio falling to 36%.
Exports - underlying export performance looks to have remained robust
Exports rose by 9.6% in Q1 2025, up 23% on the year, split between a 46% rise in goods exports and more sedate 3.6% rise in services trade. This largely reflected firms front-running expected US tariffs, but there also appears to have been a structural upward shift in exports, reflecting new pharmaceutical production facilities coming online and fresh investments in intellectual property assets. Hence, we have revised up our forecast for Irish exports to 9.6% growth in 2025.
Peering through the statistical fog, underlying export performance has remained robust. Ireland’s manufacturing PMI was 53.7 in June, a 3-year high, remaining above the 50 no-change level. Traditional manufacturing output in May was up 2.2% on the year. The defensive character of Irish exports, concentrated in pharmaceuticals, med-tech and ICT is still evident.
