Irish economy to grow 3.8% this year despite rising inflation

The bank has revised its forecast for Modified Domestic Demand (MDD) growth in 2026 upwards, with the economy expected to expand by 3.1% in 2027, following growth of 4.7% last year.

Investment, housing delivery and public infrastructure spending are expected to support growth, although higher energy prices and borrowing costs are likely to weigh on households and businesses.

AIB forecasts inflation of 3.5% this year and 3.1% in 2027, as higher oil and gas prices feed through to consumers. Inflation is expected to return to 2% in 2028.

David McNamara, AIB chief economist and lead author of the report, said the domestic economy would continue expanding, but warned of challenges ahead.

“However, the renewed inflation shock will weigh on household incomes and consumer spending, while headline GDP will remain volatile because of multinational activity,” he said.

Employment has increased by 461,000 people, or 20%, since the beginning of the decade, reaching more than 2.8 million. AIB expects employment growth of 1.2% this year, rising to 2% in both 2027 and 2028.

The unemployment rate is forecast to increase from 4.6% last year to 5.1% in 2026.

Housing supply is also expected to increase, with AIB forecasting 39,000 completions this year, 41,000 in 2027, and 45,000 in 2028. The bank said continued delivery of water, sewage, and energy infrastructure would be essential to sustaining output above 45,000 units.

Consumer spending growth is forecast to ease to 2.3% this year and 2.1% next year, with households remaining cautious amid economic uncertainty. The household savings rate has risen to around 20%.

Exports are expected to grow by 2.8% in 2026 and 5.2% in 2027. AI-related exports are expanding rapidly, accounting for almost 13% of customs goods exports so far this year, compared with 6% in 2025.

 David McNamara, chief economist at AIB.
The report also warns that public finances remain reliant on corporation tax windfalls, despite a projected budget surplus of €9.5bn in 2027.

“Strong public, household and business balance sheets provide important resilience, but geopolitical uncertainty, inflation and higher borrowing costs mean the risks to the outlook remain tilted to the downside,” McNamara added.

* This article was originally published on BusinessPlus.ie.