Irish Economy to Grow at Slow Pace with Upside Inflation Risk -IMF
The Irish economy is projected to grow at a slower but still robust pace, the International Monetary Fund (IMF) said at the end of its latest official staff visit to Ireland.
The Irish economy has maintained a strong performance despite trade and geopolitical tensions and elevated uncertainty. But given Ireland’s structural vulnerabilities in an increasingly unpredictable world, this resilience cannot be taken for granted.
IMF said navigating the fallout from the war in the Middle East calls for agile, calibrated responses that prioritise temporary and targeted measures for the vulnerable, rather than broad-based ones such as tax cuts, subsidies, and price controls.
At the same time, Ireland must look beyond immediate pressures and future-proof the economy for the long run, the IMF added.
The Fund said that, with the economy in a relatively strong position, it is time to make sound choices that address vulnerabilities, improve productivity, and secure lasting prosperity.
The key policy priorities include accelerating public investment efficiently while closely controlling current expenditure growth and minimising spending overruns, to achieve a broadly neutral fiscal stance; broadening the tax base to reduce reliance on highly concentrated corporate income tax; and strengthening the national fiscal framework and budget credibility.
IMF recommends maintaining close monitoring of financial stability risks; reviewing and adjusting the macroprudential settings as warranted; continuing work to strengthen regulation and supervision of the non-bank financial sector, and addressing data gaps.
The multilateral lender guides Ireland in boosting housing supply, enhancing energy security by staying the course on the green transition and further integrating into the EU energy market, preparing workers for the AI transformation, and supporting the deepening of the EU single market.
The statement notes that near-term growth momentum is expected to face headwinds from the war in the Middle East, reflecting higher energy prices and global uncertainty.
Against this backdrop, modified domestic demand growth is projected to moderate from almost 5 per cent in 2025 to about 2½ per cent in 2026-27, the IMF said.
The fund noted that the slowdown largely reflects a softening of private consumption due to weaker employment and real income growth as well as normalization of modified investment from a high level in 2025.
Headline inflation would be impacted by higher energy prices and is projected to rise to about 3½ percent on average this year and return to 2 percent around 2028.
Significant uncertainty remains and risks to the growth outlook are on the downside and to inflation on the upside. Substantial external risks stem from the war in the Middle East, with its impact on the Irish economy contingent on the intensity and duration of the energy price shock.
Ireland’s high reliance on multinational enterprises (MNEs) continues to be a source of vulnerability. Rising geoeconomic fragmentation and elevated policy uncertainty could lead to further reorganization of supply chains and shifts in trade and capital flows that could be detrimental to Ireland’s globally integrated economy.
The rapidly evolving landscape of AI poses novel risks: misuse of AI technologies could threaten cyber security and a revision in expectations of AI-driven productivity gains could trigger steep financial market corrections.
On the upside, rapid AI adoption and progress with the EU Single Market could be associated with greater dynamism and productivity. Domestically, persistent supply-side constraints in infrastructure, housing, and labor markets could weigh on productivity.
Fiscal Policy
A broadly neutral fiscal stance would be appropriate in the near and medium term. We support the planned scale-up of public investment to close the housing and infrastructure gaps, which could also crowd in private investment.
However, current expenditure has become elevated following rapid growth in recent years, with health and social spending repeatedly exceeding budget allocations. With the economy already operating at full capacity and upside inflation risks, fiscal policy should avoid injecting unnecessary stimulus and prevent boom-bust dynamics.
Furthermore, a broadly neutral stance would help build buffers for future shocks and spending needs stemming from aging and the green transition.
“We assess the fiscal stance in 2025-26 to be moderately expansionary and recommend closely controlling current expenditure growth and minimizing spending overruns”, IMF said.
Staying within the expenditure ceiling path in the Medium-Term Fiscal Structural Plan (MTFSP) will be key to achieving a broadly neutral fiscal stance from 2027 onwards.
Fiscal responses to materializing risks need to be properly calibrated, focusing on targeted and temporary support. In a downside scenario of moderately lower growth and higher inflation, automatic stabilizers should be allowed to work fully, and any additional discretionary fiscal support should be time-bound, targeted and maintain the price signal.
A broadly neutral fiscal stance would remain appropriate in such a scenario. In a severe scenario where growth slows sharply, Ireland has fiscal space to scale up discretionary targeted support and accommodate higher deficits temporarily while deepening reforms to safeguard long-term fiscal sustainability.
Strengthening expenditure controls can help minimize spending overruns. The upcoming Comprehensive Review of Public Financial Procedures offers an opportunity to update procedures to reflect current operational practices.
In addition, stronger expenditure control measures, including tighter in-year monitoring, earlier intervention, and corrective actions should be implemented systematically.
“We welcome the Expenditure Control and Escalation Process which sets out a formalized escalation pathway to strengthen expenditure management and a phased approach to address overruns across government departments”.
Upstream measures, including commitment control over procurement, could be improved by enhancing digitalization and integrating platforms and data.
Importantly, expenditure controls can only be strengthened meaningfully if budget planning sets binding targets that limit the expectation of and the need for additional appropriations.
The authorities’ commitment to accelerating infrastructure spending is welcome and effective implementation will be key. To ensure timely delivery of infrastructure projects, policy should continue to address key structural bottlenecks to investment, particularly those arising from the complex planning and judicial review process.
The Accelerating Infrastructure Action Plan provides useful guidance for further reforms and should be implemented without delay.
“We support reform priorities in the Action Plan to cap the costs of environmental planning judicial reviews, streamline court procedures, shorten consent procedures, and eliminate dual approval processes for critical infrastructure projects”.
IMF guides that broadening the tax base would provide more sustainable revenue sources for permanent spending commitments and allow for channelling more excess corporate income tax (CIT) revenues into the two savings funds. Increasing local property tax rates could provide higher and more stable revenue streams.
The number of preferential VAT or excise rates, especially on items that disproportionately benefit higher-income earners, could be reduced. Broad-based personal income tax (PIT) reliefs and exemptions could be reduced. Introducing additional PIT bands with appropriately calibrated rates and replacing the Pay Related Social Insurance and Universal Social Charge thresholds with gradual phase-ins can also strengthen work incentives.
The potential impact on progressivity of these reforms would need to be mitigated by means-tested transfers.
“We reiterate our recommendation to strengthen Ireland’s national fiscal framework and budget credibility. The EU fiscal framework is neither binding for Ireland nor sufficient to safeguard its public finances while addressing urgent infrastructure/housing needs”.
The Fund said the authorities should adopt a credible and binding fiscal rule, preferably anchored in a long-term net debt target, which could be operationalised through multi-year net expenditure ceilings.
“It is advisable to legislate this national fiscal framework and assign the IFAC a central role in relation to it”. IMF stated.
“Given the lack of a fiscal anchor at present and to enhance budget credibility, we recommend that the MTFSP guides annual budgets and acts as a binding mechanism on spending ceilings over the medium term”.
Financial sector policy
Systemic risks have risen amidst tightening global financial conditions and a volatile external environment, warranting ongoing vigilance.
Globally, financial conditions are tightening somewhat from highly accommodative levels as markets are pricing in higher inflation, slower growth, and negative sentiments, contributing to higher systemic risks that pertain mostly to the large non-bank financial institutions (NBFI) sector.
Still, equity valuations continue to appear stretched, raising concerns about further abrupt corrections and mispricing of risk which could spill over to the Irish financial system.
Domestically, Ireland remains vulnerable to concentration risks from the reliance on a small set of globalized sectors and second-round effects in case of a shock. Finally, digitalization and operational risks, including cyber threats and reliance on external providers, add complexity to the risk environment.
The banking sector has proven resilient, but risks should continue to be monitored closely. Although profitability has moderated with the interest rate normalization, it remains above the pre-pandemic level, with a stable outlook.
IMF noted that capital positions of the domestic banks have strengthened further, benefiting also from the finalisation of Basel III reforms, and are above the regulatory requirements. Liquidity is sound and asset quality has continued to improve.
Vulnerabilities, however, persist in certain portfolios, particularly in leveraged finance to firms and in the commercial real estate sector.
Banks’ asset quality is anticipated to remain a key area of supervisory focus, given the macroeconomic risks, including escalation of geopolitical tensions.
Additionally, evolving risks from digitalisation and cybersecurity, accelerated by developments in frontier AI models, require ongoing attention.
The banking sector landscape is changing and the impact of the EU’s Sixth Capital Requirements Directive (CRD6) on non-EU banks and financial institutions directly providing core banking services to EU clients may have implications for EU banks’ and financial institutions’ business models, cross-border activity, and supervisory engagement, which warrants ongoing monitoring. International banks’ vulnerability to funding shocks and interconnectedness with NBFIs should continue to be monitored closely.
Macroprudential policy settings remain appropriate, and the Central Bank of Ireland (CBI) should stand ready to adjust them if macro-financial conditions worsen. The counter-cyclical capital buffer (CCyB) rate is maintained at 1.5 percent, a level consistent with cyclical risk conditions being neither elevated nor subdued.
Macro-financial indicators overall support this assessment, with the economy performing robustly but amid significant uncertainty. Notwithstanding the pick-up in credit activity, to date this has not appeared to be contributing to a build-up of systemic risk, and overall cyclical conditions have not changed from last year, which would indicate the need for policy adjustment.
The CBI should continue to conduct stress tests, and review and adjust the macroprudential policy settings as warranted to respond to evolving macro-financial conditions and emerging risks. In a scenario where the materialisation of downside risks leads to impairment of credit provision, the use of releasable capital buffers should be considered.
Work should continue to address risks and strengthen regulation and supervision of non-banks, which is a key priority for the CBI. The CBI continues to actively engage with the international community and contribute to policy development and implementation.
It should also continue to monitor the implementation of the macroprudential measures for Irish property funds and GBP-denominated liability-driven investment funds and maintain its leadership role in developing a macroprudential framework for non-banks in cooperation with other institutions.
IMF said ongoing close engagement with ESMA, including through common supervisory actions, peer reviews, and voluntary supervisory colleges, is welcome.
The CBI’s ongoing efforts, in conjunction with the ESMA and other NCAs, are important for continuing to improve data availability and quality, enhancing risk assessment across the NBFI sector, and developing system-wide stress tests.
Structural policy
Persistent housing shortages warrant renewed efforts to boost housing supply. Progress has been made, including the pickup in housing completions and a gradual shift toward higher density. Achieving the new housing targets will require further reforms, including to streamline the complex planning and judicial review process.
Enhancing apprenticeship and training programs could alleviate the skill shortage and improve productivity in the construction sector. Crowding in private capital—through providing planning certainty and infrastructure—could also help boost housing supply.
The New Rent Control Framework, albeit retaining strict rent controls for existing tenants, introduces more predictability and flexibility into the rental market, which could increase rental supply. We recommend removing rent controls to further boost rental supply, while continuing to support vulnerable households.
Sustained productivity growth is closely linked to the availability of reliable and competitively priced low-carbon energy. Electricity infrastructure bottlenecks are seen as an important impediment to investment and growth, and the government has rightly prioritized upgrading of the electricity grid.
Meeting energy demand, including in the context of rapidly growing AI-related needs, requires additional generation and reinforced infrastructure, as well as implementing carbon pricing with a broader coverage.
Strengthening Ireland’s integration with the EU energy market, including the grid, is a key step to bolstering the security of electricity supply.
At the same time, Ireland possesses immense potential for offshore renewable energy generation. Harnessing this potential, alongside improved transmission and storage, will be key for bolstering energy security and competitiveness as well as for delivering a cost-effective green transition.
Ireland needs to prepare its labor market for AI. Ireland is relatively more exposed to AI than many advanced economies because of its concentration of ICT, financial services, and other knowledge-intensive industries.
While AI can be associated with substantial productivity gains, realising these gains will require continuous reskilling and upskilling as labour demand shifts towards advanced digital and analytical skills. Reforms that foster innovation and growth would help leverage the abundant talent.
IMF said more broadly, through policies aimed at helping workers adapt and acquire new skills and enhancing labor mobility, including through affordable housing, Ireland can strengthen its competitiveness while ensuring that adjustment pressures do not undermine inclusive growth.
The Irish economy could benefit significantly from deepening the EU Single Market. A more integrated EU single market would allow Irish firms to expand across Europe with fewer frictions, leverage economies of scale, and boost financing for Irish start-ups.
It would also enhance the resilience of Irish firms, making them less vulnerable to supply-chain and trade policy shocks originating elsewhere. Advancing new EU trade agreements would allow Irish firms to diversify supply chains and capture efficiency gains from trade.
In particular, the Savings and Investments Union can unlock new opportunities and facilitate the redirection of savings into productive investments, increasing household wealth and resilience.
Ireland’s financial sector, a global leader in asset management, is uniquely positioned to lead the transition. The proposed 28th corporate regime, if designed and implemented well, would enable Irish firms to operate more efficiently in the Single Market.
Simplifying regulations and creating a single set of rules would facilitate deeper integration and cross-border activity, strengthen domestic firms, and bring economies of scale. UN Warns Against Global Sand Shortage, Pushes for Alternatives
