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Irish GDP jumped in Q2, as exports rebounded from a sharp decline in Q1. That masked a fall in Modified Domestic Demand (MDD), driven by a collapse in volatile intangible investment. We expect this weakness to prove temporary. Intangible investment usually rebounds quickly and should be supported as AI-related spending accelerates, while consumer and government spending continue to support growth.
Economy slowed in Q2, but will rebound
The Irish economy rebounded strongly in Q2, with GDP rising 10.2%. The increase was driven by a 17.1% rebound in exports following a sharp fall in Q1. By contrast, MDD, a better gauge of domestic activity, fell 0.8%. That reflected a sharp decline in investment, particularly intangible investment (-24.7%) and construction investment (-5.6%).
However, we aren’t too worried about the drop in MDD. Intangible investment is particularly volatile as its still somewhat distorted by multinationals and the AI buildout which means investment should bounce back in Q3. Moreover, Q1 growth was revised up from 0.3% to 1.4%. Looking through the volatility, growth averaged a steady 0.3% in the first half of the year.
Reassuringly, consumer spending rose 1% in Q2 despite higher inflation and weaker consumer confidence. Strong spending growth in the first half of the year, combined with a household saving ratio of 19.1%, suggests consumers are both willing and able to absorb higher inflation by drawing modestly on excess savings.
All told, weak MDD growth in Q2 looks to be a temporary setback rather than the start of a broader slowdown with growth likely to recover in Q3.
Higher energy prices will slow, but won’t stop growth
Looking ahead, we expect the Irish economy to maintain steady growth through the second half of the year and into 2027 for two main reasons.
First, the labour market has remained resilient despite the energy shock. The unemployment rate was unchanged at 5.0% in August. A stable jobs market should support real income growth and help sustain consumer spending, albeit at a subdued pace.
Second, fiscal policy should remain a significant tailwind to growth. Fuel excise duty cuts have already softened the impact of higher energy prices on households and the extension of those measures through September and October should offset much of the inflationary effect of rebounding oil prices that we would have otherwise expected.
Admittedly, inflation is still likely to remain around 3.5%-3.75% through the rest of the year, further ECB tightening will weigh on activity and global uncertainty remains elevated which will all drag on activity. Even so, we still think the Irish economy is considerably stronger than most of Europe, even after stripping out multinational distortions. As a result, we expect Irish economic outperformance to continue.
All told, weak MDD in Q2 was largely the result of volatile investment, which we expect to rebound in Q3. We continue to forecast MDD growth of around 2.7% this year, down from 4.8% in 2025, as robust consumer spending continue to support growth over the coming quarters despite higher inflation.
