Ireland’s medium-term economic outlook: Risks and opportunities

Abstract

The objective of this Economic Outlook is to provide macroeconomic projections and scenarios of potential future paths for the economy over a ten-year horizon. Given the highly globalised nature of the Irish economy, the potential impacts associated with external shocks feature prominently. Current geopolitical tensions and ongoing developments in international trade relations raise concerns regarding the risks ahead for the global economy. These risks pose a great challenge for the Irish economy, given its reliance on multinational corporations and their significant contributions to the overall fiscal balances.

Before describing the macroeconomic projections and scenarios, it is important to stress that the Economic Outlook is not a forecast of future economic performance. Instead, it comprises projections of what might happen subject to a broad range of underlying assumptions. Understanding the economy’s vulnerabilities and the dynamics of how economic shocks play out across sectors is an important input into the policymaking process.

An underlying assumption of our baseline projection is that the global economy continues to evolve along its current pathway without any further economic shocks; for example, related to tariffs, world demand or exchange rates. An assumption of no further shocks is unrealistic, but it enables us to project a ‘business as usual’ pathway for the economy from which we can assess the impacts of potential challenges or opportunities facing the economy. Our baseline projection is for an annual average economic growth rate of 2.3 per cent in modified gross national income (GNI*) out to 2030 and 2.1 per cent from 2031 to 2035. Despite recent international upheavals and substantial domestic challenges, the outlook for the economy appears relatively favourable in the absence of any unforeseen shocks. There is a cautionary note to be added, however. While headline public finance indicators are strong, budget surpluses are based on windfall corporation tax receipts. Windfall taxes by definition could disappear rapidly, meaning that a healthy headline general government surplus of e5 billion could become a deficit of €13 billion if the windfall receipts disappeared, based on figures from Budget 2026. So while the baseline projects a potentially strong economic pathway over the coming decade, there is a fundamental vulnerability in public finances, in addition to other potential vulnerabilities, such as ongoing trade tensions. It is also the case that longer-term challenges, such as an ageing population and costs of climate change, are likely to become more binding in the years after our projection horizon.

History tells us that unanticipated events can have major impacts on the economy and society, with Brexit, the COVID-19 pandemic and the Russian invasion of Ukraine recent examples. Our task is to consider what kinds of shocks, events or policy initiatives (both positive and negative) could arise and how they might impact the economy. The implications of three potential external shocks are examined:

• A Global Slowdown scenario assesses the implications of a downturn in world trade via an across-the-board reduction in export demand • A Competitiveness scenario examines a loss of competitiveness relative to our international trading partners • A Multinationals scenario quantifies the impacts of reduced operations of multinational corporations in the pharma and information and communication technologies (ICT) sectors.

These risks are centred around foreign-owned multinational corporations, which contribute around half of the overall gross value added within the economy. The other half comes from the much more numerous domestically owned firms, which are characterised by significantly lower average productivity compared to the multinational sector. Improving productivity within the indigenous sector could improve their share of economic activity, which is examined in the following scenario:

• A Domestic Productivity scenario explores the potential outcomes associated with improving the productivity of indigenous firms.