Labour market bounces back in Q2

The Irish labour market appears to have weathered the initial phase of the Iran conflict relatively well. Employment rebounded after an unusual fall in Q1, nudging the seasonally adjusted unemployment rate lower. The government’s generous fuel subsidies have also cushioned households and businesses from the rise in oil prices. So even as employment growth moderates this year, the economy remains strong enough to keep the unemployment rate around 5.0%.

Employment growth rebounded in Q2

The labour market rebounded in Q2 with employment rising by 19,500 in Q2, the largest rise in five quarters, reversing the fall in Q1. This pushed the seasonally adjusted unemployment down from 5.0% to 4.9%. That supports our view that the Q1 weakness was a temporary blip rather than the start of a sharp slowdown in the Irish labour market.

Admittedly, monthly unemployment data suggests the headline unemployment rate rebounded to 5.1% in July and employment growth of 0.8%y/y in Q2 was well below the 2023-2025 average of 2.8%. However, generous fuel subsidies have limited much of the impact of higher oil prices on inflation and the economy. That should support demand and allow employment growth to recover gradually in the second half of the year, limiting any further rise in unemployment.

Elsewhere, the participation rate nudged up 0.1ppt in Q2, after falling sharply in Q1, although it remains 0.6ppts below its recent peak in Q1 2025. That said, participation has been close to pre-financial crisis highs for a while so we aren’t particularly worried, especially as strong inwards migration has been driving growth in the labour force and is set to continue.

All told, the labour market weathered the first few months of the Iran shock well and recovered from an unusually weak start to the year.

Economy strong enough to prevent a large rise in unemployment

Further ahead, employment growth is likely to moderate after a period of exceptional strength. But the domestic economy is strong enough to prevent a large rise in unemployment. We expect the unemployment rate to average 5.0% this year and 5.1% next year.

Indeed, a resilient labour market will also support real household income growth, despite elevated inflation, supporting consumer spending. What’s more, households are saving 12.5% of their income, giving them scope to cushion spending by saving less. The government is also considering raising income-tax bands in the October Budget, which would provide an additional boost to household finances.

Ultimately, strong momentum in the domestic economy means that we expect solid jobs growth to continue in the second half of the year despite growing headwinds from higher energy prices, persistent uncertainty and ECB rate hikes. The big risk is that renewed tensions in Iran prompt energy prices to surge even higher, pushing inflation well over 4% and prompting firms to pull back on hiring as margins are squeezed.