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Ireland’s economy ended 2025 poorly, with GDP contracting by 3.8% in the final quarter. However, this is more noise than actual signal. The domestic economy performed far better, growing by 1% in Q4. The big question now is whether the recent rise in energy prices will continue. If so, this would push up on inflation and damage 2026’s growth outlook.
Ireland’s domestic economy stronger than figures suggest
Ireland’s headline GDP for Q4 shows a 3.8% contraction in Q4. The drop was driven by a big fall in exports (-3.4%) and investment (-4.6%), which are distorted by multinationals’ activity. Looking at Ireland’s domestic economy in isolation, the latest figures show it grew by 1% in Q4 and by almost 5% in 2025. This was by strong consumption growth (0.9%) in Q4 and a big jump in modified investment, which strips out aircraft leasing and other distortive activities.
Rather than the 3.8% contraction, the takeaway is that this strength in domestic demand at the end of 2025 highlights Ireland’s continued economic resilience throughout the year in the face of uncertainty from US tariffs. Irish GDP grew by 12.3% across 2025, which means the weakness towards the end of the year was far smaller than the surge in multinational activity we saw back in Q1, which boosted activity.
Energy price moves matter more to Ireland’s economy
The big question now is whether the recent rise in energy prices lasts, which would push up on inflation and dampen growth. Indeed, Ireland imports almost 80% of its energy, making it particularly exposed to rising wholesale prices.
Higher oil prices would probably add around 0.2ppts to inflation in the coming months if prices stay high. However, the bigger impact would come from natural gas prices, which largely determine household energy bills. If sustained, the 60% rise over the last few days in European gas prices would feed through over the course of this year to push inflation back over 3%.
Higher inflation would drag on real household incomes and therefore consumption, which has helped to underpin strong domestic demand in recent years. What’s more, around a third of Ireland’s economy is manufacturing. While that figure includes multinationals’ activity, the sector is far more energy-intensive than most, making it susceptible to higher energy prices.
That said, Ireland’s recent economic strength means it has more tools to support households and firms against an energy price shock. The household savings ratio is 14.8%, which would help offset weaker income growth. Meanwhile, the government’s debt-to-GDP ratio is just 32.8%, so it has plenty of room to reinstate energy credits, even if Minister for Public Expenditure, Infrastructure, Public Service Reform and Digitalisation, Jack Chambers, appears to have ruled them out for now.
The European Central Bank (ECB) is also in a better position than the Bank of England. Inflation expectations remain well-anchored in the eurozone, which should allow the ECB to ‘look-through’ more of any energy price shock than in the UK.
Ultimately, it’s too early to say just how large an impact higher energy prices will have on Ireland’s economy. Ireland will no doubt feel the pain from another energy price shock given its reliance on energy imports. However, strong growth in recent years has set households and firms up well to withstand any sustained increase.
