Look under the hood. There are ‘echoes of 2006′ in the Irish economy

A bit like a footballer who celebrates getting on the World Cup scoresheet after blasting the ball past their own keeper, Donald Trump says his putative peace deal with Iran has averted a “worldwide depression”. The deal reached last weekend is little more than an agreement to further negotiations between the two sides. As with everything involving the White House at the moment, a great deal of scepticism – even pessimism – is warranted. Of course, any depression would have been of Trump’s making given his decision to join with Israel in bombing Iran in February, sparking a wider Middle East conflict and a blockade of the Strait of Hormuz , a vital channel for global trade. It is far too early to say whether peace will hold. It’s not certain even that the current administration is competent enough to resolve a Middle East crisis of its own making, one that has cost thousands of lives in the region and caused immeasurable harm to the global economy through higher energy prices and damaged oil and gas infrastructure. This is the landscape in which the Central Bank of Ireland published its latest forecasts for the Irish economy this week. It came a week after the Irish Fiscal Advisory Council (Ifac) published its latest fiscal report, which restated the watchdog’s long-running concerns with the Government’s approach to the public finances. Ireland’s biggest risks, as the economists see them, can be put into two main baskets: the geopolitical and the domestic or public financial. Into the former category we can put a plethora of vitally important factors – global oil prices, trade barriers, war-related supply-chain disruptions – over which Irish politicians and the State itself have little or no control. Certainly there is debate to be had and political wrangling to be done over the supports that will need to be put in place to shield the most vulnerable households and businesses from the worst effects of an increasingly fraught global environment. By and large, little can be done in Leinster House or on Merrion Street to change the risk profile. At the launch of the Central Bank’s first financial stability review of 2026 late last month, governor Gabriel Makhlouf said that if he had to rank them, the geopolitical storm engulfing the global economy was a top concern because “we have zero control over that”. He was speaking well before the United States and Iran signed a memorandum of understanding that the Trump administration claims will guarantee the reopening of the Strait of Hormuz. “It’s not obvious today that there’s a path to returning all of that to some sort of normality,” Makhlouf said in May. That path remains murky one month later, despite last weekend’s putative agreement. On Thursday, the Central Bank published its second quarterly economic bulletin of the year, containing a set of forecasts for the Irish economy that provide a fuller account of the impact of the war in Iran. Its last figures – published in March, just weeks after the first US-Israeli strikes and Iran’s retaliation – set out several potential scenarios for the trajectory of global energy prices and, in turn, Irish inflation. Now, the bank’s economists say there is no going back to the baseline. Even if the Strait of Hormuz reopened fully in the coming days, the assumptions made in March simply don’t hold any more. What’s more, the oil and gas market tremor could continue to send out shock waves as the year progresses. “It’s unlikely that we will very quickly return to the levels, the volumes of activity going through the Strait of Hormuz,” said Martin O’Brien, head of the Central Bank’s economic analysis division. That’s bad news for oil prices, and equally so for shipping prices, which eventually bleed into the prices that Irish consumers pay for the wide range of goods that we import into the country. It’s against this backdrop that the forecasters now expect general inflation in the Irish economy to run at an average of 3.5 per cent this year, up from 2.9 per cent in the Central Bank’s March forecasts. In a more adverse scenario in which the Strait remains closed for longer, Irish inflation could reach an eye-watering 5 per cent this year. So far, the increase in the pace of inflation has been driven by energy prices, specifically soaring liquid fuel prices (petrol, diesel, home heating oil), which contributed to a 15.3 per cent and 11.9 per cent spike in the basket of energy goods in April and May, respectively. Worryingly, however, there is evidence that the impact of this shock is moving into other areas of consumer spending. The issue is that even if global oil and gas prices retreat over the coming weeks and months, the butterfly effect will be felt in the price of other staples. “In particular,” said Robert Kelly, director of economics and statistics at the Central Bank, “if you look at the likes of food, for example, we’re seeing a substantial increase in our outlook for food inflation.” Famously, Ireland’s economy is a difficult one to assess. As countless economists and commentators have highlighted over the years, there are really two Irish economies – the one in which most of us live and work and what might be called the business economy, dominated by a small number of multinational companies that account for an outsize proportion of the State’s tax take. At the latter level, the Republic is slated for strong growth this year. Even modified domestic demand, a metric that aims to strip out the distorting effect of multinational corporations on investment levels, will grow at a rate of 3.3 per cent this year, the Central Bank said. This is mostly down to “large recent movements” in machinery and equipment investment levels, tied to the artificial intelligence -led data-centre boom. So even when economists try to clarify the state of the “real” Irish economy, it’s difficult to escape the gloss that the multinational sector puts on it. At the level of the individual worker, household or consumer, however, the Central Bank’s forecasts are really quite troubling. The economists expect wages to grow by about 4 per cent this year. If, as forecast, Irish inflation holds at 3.5 per cent, that will all but eradicate any income gains for households, leaving many treading water. If it goes closer to 5 per cent, the impact will be even more acute. Kelly explained that in recent years of high inflation, participation rates in the labour market were also on the rise, which helped offset some of the impact of rising prices. Single-income households may have become multi-income households as the economy grew, buoying disposable income levels. That’s not going to happen in 2026. Unemployment, although still extremely low at the moment, is expected to rise somewhat this year, and employment growth will slow. “Part of that is going to be natural,” Kelly said. “We reached that stage in the [labour market] cycle where you’d expect the growth in these things to be easing.” Part of it is also the generally weaker trading environment that employers are operating in. There may also be some effect from the replacement of jobs by artificial intelligence tools. That trend is in its infancy at the moment, however. The net effect is that gross disposable income levels per household are now expected to fall by about 1 per cent this year in the face of rising inflation, weaker job creation and even rising unemployment. For people struggling at the lower end of the income spectrum, the effect is going to be severe, requiring targeted intervention from the Government, possibly before October’s budget. If global shocks and their transmission to the Irish economy are a top concern at the moment, the domestic and public financial environment is the second category of anxieties about which economists are sounding alarm bells. How the Government responds to the Iran war tremors is conditioned by that environment. It will also shape the State’s ability to respond to future crises, said the Central Bank in a signed article accompanying its latest bulletin this week. Politicians have tended to take a rather broad definition of the word “targeted” in recent budgets. There is little evidence that this is going to change in Budget 2027. Minister for Finance Simon Harris certainly hasn’t inspired any confidence on that front. “There will be support for people in the budget, but I think we need to be very broad in what we mean by that,” he told reporters recently. “I personally believe cutting people’s income tax and allowing people to keep more of their own money is an important thing to do when people are under cost-of-living pressures.” Some economists would see that as a commitment to poking even more holes in the Irish tax bucket. That the Government is under pressure to spend the windfall revenues from ballooning corporation tax receipts – which may grow to another record this year – is obvious. What is becoming increasingly clear, however, is that the scattergun approach of insulating everyone from the gales blowing through the Irish economy – through expensive one-off measures such as energy credits, for example – is scarcely viable in 2026. Ireland’s budgetary watchdog Ifac made that very clear in its latest fiscal assessment report. Speaking at an Oireachtas committee this week, Ifac chairman Seamus Coffey put it in stark terms. For every €6 the State collects in corporation tax receipts, it plans to spend €5 and put €1 away. With the Coalition spending like the proverbial drunken sailor, the State is going to run ever smaller budget surpluses over the coming years. When corporation tax receipts are stripped out, the exchequer will actually run an underlying deficit of €11 billion this year, widening to almost €21 billion by 2030. It means the Government will have to borrow to fulfil its commitment to hiving off money for its two rainy-day savings funds. Ominously, Coffey said there were “echoes of 2006′′ within the current Irish economic climate. In the boom years leading up to the 2008 financial crash, he said the economy and the exchequer were “hugely dependent” on the construction sector, which was itself dependent on the availability of cheap, easy credit. “So the issue in 2006 was that the credit tap turned off very, very quickly, and [when that happened] it was 200,000 jobs lost in construction with over 100,000 further jobs lost across the entire economy. We can see, in retrospect, looking back at 2006, the reliance on one sector. In 2026, there are clear echoes with the reliance on [corporation tax] revenue.” Crucially, neither the Central Bank nor Ifac are calling on the Government to row back on their capital spending commitments. From the housing crisis to strained water and electricity infrastructure, Ireland continues to suffer from the impact of post-2008 austerity policies on capital spending levels. Making up that shortfall in key areas is of vital importance to the future of an Irish economy that may or may not always be able to rely on blockbuster corporation tax returns from US multinationals. All of that, economists believe, should translate into a budget that focuses on long-term infrastructure while protecting the worst off from the squeeze of soaring energy and consumer prices. Will the message get through? Experience would suggest otherwise.