Economy set for continued growth despite inflation risk

AIB’s latest Economic Outlook is predicting a strong rate of growth for the Irish economy for the coming years, although higher inflation is likely to cap the rate of economic expansion.

In its Autumn 2026 Economic Outlook Report, AIB said it expects Modified Domestic Demand – which measures the size and performance of the domestic economy and cuts out the multinational distortions – to grow by 3.8% this year and 3.1% next year.

This follows growth of 4.7% last year, the bank noted.

AIB said that exports, which were boosted in recent years by pharmaceuticals and by semiconductor and IT services activity, are forecast to grow by 2.8% this year, rising to growth of 5.2% in 2027.

AI-related exports are now growing quickly off a low base, and accounted for nearly 13% of all exports so far in 2026 compared to just 6% in 2025, the bank said.

Today’s report predicts that inflation will rise further this year, as higher oil and gas prices feed through to consumers.

AIB predicted that harmonised Index of Consumer Prices (HICP) inflation is expected to peak in the final quarter of this year before easing, averaging out at 3.5% for 2026 and 3.1% in 2027, before settling back to 2% in 2028.

But it cautioned that risks to the forecast remain on the upside.

On housing, AIB said that supply is expected to continue to increase. The bank noted that completions rose to 36,000 units last year and were 11% higher year on year in the first six months of this year.

“Indicators of activity offer some encouraging signs for a further uplift in supply, prompting a forecast of 39,000 completions in 2026, rising to 41,000 next year and 45,000 in 2028, underpinned by a sustained uplift in the apartments sector,” it said in today’s report.

But it added that delivery of water, sewage and energy infrastructure will be vital to sustaining output above 45,000 units.

Meanwhile, consumer spending is expected to grow at a “decent” but slower pace, as inflation affects household purchasing power and jobs growth moderates.

The bank noted that households remain cautious and the household savings rate has risen to around 20%, with households saving approximately €1 in every €5 earned in aggregate.

“This trend is expected to continue, as factors such as global uncertainty and ageing demographics boost savings behaviour,” it added.

AIB’s Chief Economist David McNamara said that Ireland’s domestic economy is expected to continue expanding, supported by investment, housing delivery and public infrastructure.

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

“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,” he added.