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GDP collapsed in Q1. This was driven by a sharp fall in goods exports still unwinding from last year’s tariff front-running. More telling is Modified Domestic Demand (MDD), which removes the distortive impact of multinationals. MDD grew by 0.6% on the quarter. Further ahead, we expect growth to be slower this year as higher inflation drags on real incomes, dampening consumption growth and expect MDD to grow by 2.5-3.0%, down from almost 5.0% last year.
Irish economy is not in a recession despite headline figures
GDP contracted by 12.1% in Q1, as goods exports continue to unwind from last year’s surge in exports ahead of US tariffs. This marked the fourth consecutive quarter of decline, but don’t believe the headlines, the Irish economy isn’t in a prolonged recession.
MDD, a better measure of genuine activity, grew by 0.6%, as consumption, government spending and modified investment all rose strongly. Admittedly, the conflict in Iran didn’t start until the end of February and it took a couple of weeks for fuel prices to rise so the Q1 activity data gives little sign of how consumers are responding to the crisis, but the economy clearly headed into the crisis with solid momentum.
That said, the data shows real employee compensation collapsing by 3.1%, which bodes poorly for consumption over the coming quarters. This was partly driven by a decline in the total number of hours worked, although the weakness in the Labour Force Survey, where this data is from, is also at odds with payrolls. In any case, we think the data here is ripe for revision as the drop in real compensation would erase two years of real gains, which feels unlikely given that inflation didn’t even surge above 3.0% until March.
All told, the drastic drop in GDP overstates the weakness in the economy and was almost entirely driven by the unwinding of surging exports back in 2025 ahead of US tariffs. Instead, we focus on MDD rising by a healthy 0.6% in Q1 as another sign that the Irish economy will prove resilient to another period of elevated inflation.
Domestic economy strong enough to keep growing
Further ahead, we think the domestic economy will still grow by around 2.5-3.0% this year for three reasons.
First, we think the labour market remains strong enough to support a 4.0% rise in compensation per employee. This, alongside rising employment, will ensure real incomes continue to grow in aggregate, which will support moderate consumption growth even as individual households come under pressure. Admittedly, retail sales fell 0.2% in April and card payments were down 4.2% pointing to weakening activity, but consumer confidence and the PMIs rebounded in May so the weakness in April looks more like a blip than a sign of the domestic economy collapsing in Q2.
Second, households are saving over 10% over their income, which suggests they have room to offset some of the squeeze on real incomes from higher inflation by saving a bit less. That said, a prolonged closure of the Strait of Hormuz that keeps energy prices higher for longer may see household’s start to cut back on discretionary spend.
Finally, the government has already helped to insulate households and firms from the big jump in energy prices and has plenty of fiscal space to extend existing fuel excise duty cuts beyond the end of next month, if necessary, which will help to keep a lid on inflation and support household incomes.
Ultimately, growth will still be a step slower this year as higher energy prices, ECB rate hikes and a spike in global uncertainty all drag on activity, but the domestic economy is much stronger than the rest of Europe. Despite weak headline GDP figures, the broad trend of Irish outperformance will continue in 2026.
