The Central Bank of Ireland has revised down its outlook for the economy, forecasting a contraction in 2026 driven by an unexpectedly large fall in exports to the United States at the start of the year.
GDP is now projected to decline 2.7% in 2026, a cut of 4.0 percentage points from the bank's March projection. The bank reported that gross domestic product fell 17.1% year-on-year and 12.1% quarter-on-quarter in the first quarter, a much steeper drop than the 6.0% quarter-on-quarter decline recorded in the flash estimate published in April.
The central bank traced the rapid decline in headline GDP to a sharp reduction in exports of polypeptide hormones - a component linked to weight-loss drugs - that had spiked to exceptionally high levels in 2025 before returning to very low levels in the first quarter of 2026. It also cited a contraction in net trade associated with offshore goods activities such as merchanting and contract manufacturing.
"GDP fell sharply in the first quarter of 2026, highlighting its sensitivity to the (onshore and offshore) activities of a small number of multinational enterprises," the bank said.
Despite the weaker GDP reading, the bank lifted its forecast for Modified Domestic Demand - its preferred indicator of underlying domestic activity - to 3.3% for 2026 and 2.8% for 2027. Those figures represent upward revisions of 0.4 and 0.3 percentage points respectively. The bank attributed the stronger underlying demand outlook to robust investment in artificial intelligence and data centres, noting that these investments are offsetting weaker consumer spending.
Inflation expectations were revised higher. The central bank now projects consumer prices will rise 3.5% in 2026 and 2.9% in 2027, increases of 0.6 and 0.3 percentage points relative to prior forecasts. The revision is largely driven by a surge in energy prices linked to the conflict in the Middle East and the continued closure of the Strait of Hormuz, which the bank notes is now in its fourth month.
Robert Kelly, the bank's chief economist, said the reported Middle East peace deal would materially improve the inflation outlook, but cautioned that the domestic economy still needs to absorb existing shocks. He added that if the deal does not hold and prolonged energy disruptions follow, inflation could approach 5.0% and push domestic growth below 2.0% in the following year.
The bank's briefing also referenced diplomatic developments tied to the energy shock. U.S. President Donald Trump signed a copy of the US-Iran agreement at the Palace of Versailles, after which it was also signed by Iranian President Masoud Pezeshkian. The signing committed both sides to a final deal within 60 days, included provisions for oil export waivers, steps to reopen the Strait of Hormuz, and a $300 billion reconstruction fund for Iran, though the bulletin noted that Israeli strikes in Lebanon continue.
Labour market projections were also weakened. The unemployment rate is now forecast to rise to 5.1% in 2026 and reach 5.2% by 2028, levels the bank described as the highest since 2021.
Overall, the central bank warned that risks to its outlook remain "firmly tilted to the downside." Under a severe scenario that assumes an escalation of the conflict or a more persistent energy shock, the bank said inflation could accelerate toward 4.4% in 2026 and 4.8% in 2027 while growth would slow further.
Implications in focus:
- Pharmaceutical-related exports - particularly polypeptide hormones - and offshore trade components such as merchanting and contract manufacturing are key drivers behind the sharp headline swing in GDP.
- Investment in AI and data centres is supporting domestic activity even as external trade weakens.
- Energy market disruptions tied to the Middle East are the main force behind the higher inflation profile and represent a central downside risk.