Ireland’s debt is mainly owed to itself

According to Eurostat, as recently published by the CSO, Ireland’s Gross General Government debt at end-2025 was €210bn, which amounts to 32.9% of Irish GDP. That ratio is the metric preferred by the EU in terms of its Excessive Deficit Procedure (EDP) rules, rather than the net figure, as adopted by the UK, for example. In Ireland’s case the net debt figure is actually much lower anyway, at €138bn, or just 21.6% of GDP. This €72bn of offsetting assets comprises cash held by the NTMA, Irish Government bonds held in the FIF and ICNF funds, and most of the proceeds from the ECJ Apple ruling, which are invested in Exchequer bills.

Debt ratios are a convenient metric to use as a barometer of bond risk but far more important is who actually owns the debt – a country where debt is largely owned externally may find it more difficult to roll over when default risk is seen to have risen ( many Latin American countries defaulted with debt ratios below 50% whereas Japan’s debt ratio is 235%.). In Ireland’s case €24bn of the gross figure is owed to Irish households via State Savings schemes, while the Central Bank, owned by the State of course, holds around €60bn of the €139bn Irish Government bonds outstanding at end-2025. These holding were accumulated over the various QE periods and oddly enough are never mentioned by the Government in any discussion on the debt.
So adding Central Bank holdings, State Savings, and State held cash assets gives a total of €156bn.The State’s cash assets will be spent over time, and the Bonds held by the Central bank will mature, albeit slowly, to be replaced by borrowing from private sector investors, so impacting net debt. The Gross figure is forecast by Finance to rise by 14% to €240bn by 2030. However, the same forecasts assumes GDP will increase by 29% , leaving the debt ratio at 29%. May not materialise as expected of course but the current debt figure is not quite as enormous as often portrayed.

Irish GDP may contract by 10% this year.

Irish exports amount to 140% of GDP , in marked contrast to the EA average of around 50%, so domestic demand has little impact on Irish headline growth. Services actually account for over half the Irish export figure, perhaps contrary to perceptions, given the headline emphasis on goods exports, notably Pharma.The latter did rise sharply from late 2024 through early 2025, notably to the US, ahead of what was seen as the imposition of tariffs. That was a big factor in Ireland’s GDP growth figure last year (12.3%) although that all occurred in the first quarter, with GDP actually falling through the remainder of the year.

The fall-off in Pharma exports to the US has certainly been a big factor but service exports have also been weaker, a picture still evident in the first quarter GDP data. Exports fell by 7%. with goods down 13.9% and services falling by 1.7%, leading to a 12.1% contraction in GDP. Ireland’s GDP is only 4% of the EA total but that scale of decline had a material impact on the overall 0.2% fall in EA GDP, contributing almost -0.5 percentage points.

On an annual basis GDP fell by 17%, with exports down by 13% . We did expect a GDP contraction over the full year, of 2.5%, but now expect that to be around 10%. However, the weak export performance has also led to a much slower growth in net profit outflows, so GNP, which adjusts for such flows, is likely to grow by over 3.8%.

The domestic components of GDP are also likely to continue to grow, with personal consumption rising by 2.5% and Government consumption up by 3.7%. Construction spending is rising and may increase by 5%, but overall capital formation is forecast to decline on the back of a fall in Intangibles.However, modified domestic demand is set to grow by around 3.5%, and employment is also seen rising, albeit by only 1%. If GDP does indeed fall sharply it will push up the debt ratio, which we see rising from 33% to 36%.

Exports and Investment boom drive 12.3% GDP growth

Irish GDP fell sharply in the final quarter of the year, by 3.8%, but average growth for the year as a whole was 12.3%. Initial forecasts were much lower (the 2025 Budget was predicated on only 3.9%) but were revised sharply higher over the first half of the year in response to a surge in Pharma exports to the US, as firms brought forward shipments ahead of the expected tariffs. In the event Pharma was largely exempt but export growth did slow and indeed fell in the final quarter, the main factor behind the contraction in Q4.

Nonetheless, exports for the year as a whole rose by €86bn , largely driven by goods, and by 9.6% in volume terms, hence emerging as the main driver of GDP. Imports also picked up strongly, rising by 9.5%, reflecting a strong increase in domestic demand, with modified investment up by 10.9%, the strongest increase in adecade; House building rose by 19%, spending on improvements increased by over 10% with spending on machinery and equipment up by 13%.

Consumer spending increased by 2.9% in real terms, largely geared to services, as retail sales ex cars increased by only 1%. As a result of the investment boom modified domestic demand in total was much stronger than most forecasts envisaged, increasing by 4.9%.

Real GNP, which excludes factor income flows like profits and interest, increased by 2.4% while nominal GDP rose by 13.5% to €639n. As a result the debt/GDP ratio fell to 32.8% from over 38%.

Irish Growth and Domestic spending surprising to upside

Irish GDP surged by over 7% in the first quarter of the year, resulting in annual growth of 20%, fuelled by Pharma exports to the US, ahead of the expected tariffs. The following quarters were generally expected to see significant falls in GDP, as exports slowed, but in the event that has not materialised, nor did the Pharma tariffs; GDP did decline in q3, by 0.3%, but that merely offset a 0.3% rise in q2. Consequently annual growth in the third quarter was still in double digits, at 10.8%, with the average of the first three quarters at 16%. Consequently we now expect 14% growth for 2025 as a whole.

Nominal GDP is forecast to rise by 16%, to €665bn, which means the General Government debt ratio falls to 31.5% and could well drop below 30% next year.

Modified domestic demand, a measure preferred by official forecasters, also surprised to the upside, with annual growth of 5.1% in the third quarter, and we now estimate a 4.2% figure for the full year. The q3 figure was driven by a strong rise in spending on machinery and equipment, helping to boost modified capital formation growth of 11%. Government consumption grew by 4.9% but consumer spending has slowed , to 2.4% , despite strong growth in real disposable income.

Exports rose by 2.1% in the quarter, boosted by offshore production, but the positive GDP impact in the quarter was offset by a 10.4% increase in imports, reflecting the spending on machinery and equipment and a big increase in the Intangible component. However, this still leaves annual export growth at 12.7% and as such the main factor behind the double digit rise still evident in GDP.

Mortgage Market Update

The BPFI have published data on mortgage drawdowns for the third quarter, showing the number of loans for house purchase is still running modestly above last year’s total and we expect a full year figure of 37,400 against 36,000 for 2024. FTB loans still dominate, accounting for around three- in- four house purchase loans .

The average new mortgage is rising strongly, by over 8% in the the third quarter, and we expect the average for the year at €336,000, so giving a total of €12.6bn for the value of house purchase loans, the highest since 2008.

Top up loans are picking up but still relatively small at a forecast €450m, while re-mortgaging may reach €1.6bn, which would represent a 50% increase on the year. This brings the total value of new mortgage lending to €14.6bn, some €2bn above the 2024 total.

House completions are running at an annual 33,000 based on the latest figures covering the third quarter and we expect a 34,000 total for 2025 as a whole.

Only Global Recession can lead to meaningful fall in Irish Electricity prices

In August Irish households paid 57% more for Electricity according to the CPI than in early 2021. Unfortunately the Government appears reluctant to spell out clearly how prices are determined, perhaps because they can do little about it in the short term.
Wholesale prices are set to meet demand in the EU and so it is the price of the last unit supplied which determines price- a marginal cost model, Consequently the lower price of wind energy or nuclear power has no impact , with natural gas, LNG and oil the key. Blaming profiteering by say gas or oil companies is pointless as the model chosen is deemed necessary to meet demand on a real time basis. In Ireland’s case our domestic production of natural gas is falling steadily and gas imports have risen sharply, while we do not import LNG. So the price of natural gas is key and although the EU imports more from Norway and LNG from the US it is still dependent on Russia for over 20% of energy needs, albeit well down since the Ukraine invasion.
Following the spike in prices that followed, the EU brought in a short term emergency rule, allowing Governments to tax profits of lower cost producers to fund consumer subsidies but that has past. So whether renewables are 50% of electricity supply or 75% the price of gas is still what matters and unlikely to fall, absent a global downturn. Higher renewable usage may be positive for other reasons but it won’t affect price.

2026 Irish Budget

The 2026 Budget is predicated on a slowdown in the economy; GDP growth is projected at 1.0% from a massively revised 10.8% this year, with employment growth slowing to 1.5% from 2.2% and consumer spending rising by 2.3% from 2.9%. Inflation is forecast to remain benign , at 1.9%.

The Government is finally acknowledging that the rise in the Corporation tax rate to 15% will boost revenue, by a forecast €3bn, bringing total Corporation tax receipts to €34bn or 31% of total tax revenue. Total current revenue rises by just €1bn while net current spending increases by €7.5bn,with voted spending up by 9%. As a result the current budget surplus falls to €22.7bn from €29.2bn this year. Tax bands and credits are unchanged so with wage growth there will be a net increase in the real tax burden for many, but at this stage of the electoral cycle the Government has chosen spending rather than tax reductions.

This year also saw a big increase in capital spending, to €25bn, including €5.5bn additional spending as part of the National Development plan. No such commitment is included for 2026, so capital spending actually slows to €20bn. The Government also plans to add €2bn to the Infrastructure Fund and €4.5bn to the Future Ireland Fund , with the overall capital deficit projected at €24.6bn, so leading to a small Exchequer deficit of €1.8bn.

The Funds transfer is netted out in the General Government figures which also includes a surplus on the Social Insurance Fund, so the General Government balance remains in surplus, at €5.1bn, albeit half the expected figure for 2025. Total gross debt is forecast to be largely unchanged in 2026, at €211bn, which alongside the modest rise in GDP results in a further fall in the debt ratio, to 32.3%

Market for Pharma implies limited US tariff impact

I have noted elsewhere that its best to ignore macro-model simulations about the impact of tariffs when the exports are dominated by one sector, as is the case in Ireland; Chemicals and related products (call it Pharma) amounted to 75% of Irish merchandise exports in the year to May, with some two-thirds of Pharma going to the US. Better then to concentrate on the market conditions for that sector.

A key factor is how demand is affected by a change in price and studies in the US show a very limited response ; price elasticity is very low, at around -0.15%, So a 10% rise in price would reduce demand by only 1.5%, implying that if all of the 15% proposed tariff on EU goods was imposed demand would fall by just 2.25%.

A second issue is whether sellers will absorb some of the tariff in lower profits, in turn impacted by profit margins, which in the case of Pharma are huge, often at 40% or more . So Pharma companies, if they choose, may not pass on all the tariff to the consumer.

Finally, Irish Pharma exports now include weight loss drugs, the demand for which is soaring, which is a further argument supporting the view that the tariff impact on exports (leaving aside that on sentiment) has been exaggerated.

Ireland’s MAGA growth.

The threat of US tariffs has affected GDP both in the US and abroad this year, boosting imports in the former and exports elsewhere, as firms scrambled to front-run any levies. Pharma was particularly impacted, and that became clear from Ireland’s monthly trade data, showing an extraordinary surge in Pharma exports to the US and hence total goods exports given the importance of that sector in Irish international trade.

A very strong first quarter GDP was therefore widely expected, with the initial flash growth estimate at 3.2%, but that is now put at 9.7%, with net exports rising by €67bn and contributing 6 percentage points to quarterly GDP growth. There was also a notable run-down in inventories but that was dwarfed by a very large increase in investment, reflecting strong non-residential construction and a rise in Intangibles, although the latter was also captured in service imports, so dampening the GDP impact. Consumer spending remains limp, rising by 0.6% in the quarter, despite strong growth in real incomes, implying a rising savings ratio. Modified domestic demand, a measure of underlying domestic spending, rose by 0.8%.

Real GDP in q1 was 22% up on the same period last year, with exports 23% higher including 44% for goods, which on the face of it makes the 4% consensus forecast for GDP growth in 2025 look redundant. However, Pharma exports are likely to fall back sharply in the coming months even in the absence of tariffs, so we may see some strongly negative quarters, although a positive 2025 outcome still seems realistic, with employment growth notably buoyant in recent months. It’s also worth noting that the export boost was also accompanied by a very significant increase in profit outflows, notably in the manufacturing sector, with the result that GNP, which adjusts for net international profit and interest flows, actually fell 5% on the year, although it is very volatile on a quarterly basis.

Service exports driving Irish GDP, offering cushion against Trade turbulence.

Having contracted by 5.5% in 2023 the Irish economy recovered last year, with GDP rising by 1.2%, boosted by strong exports. The second half of the year was particularly robust, including 3.6% growth in the final quarter, leaving the annual change in q4 at 9.2%, so providing a strong carry-over into the current year, fortunately so , as it carries the prospect of Trumpian uncertainty and international trade turbulence.

Exports grew by 11.7% in 2024, with a notable pickup in Pharma in the final months of the year,accompanied by a substantial run-down of stocks, no doubt related to the prospect of US tariffs . However, what is striking of late about Irish trade is that service exports now dominate, notably business and computer services, amounting to €480bn last year against €329bn in goods , or 58% of total exports. Moreover, despite the strong late rise in Pharma, service exports grew by over 15% against a 7% rise in goods exports.Total exports also ended the year with annual growth of 18% so even if Pharma output is hit we still expect total export growth of 8% this year, with service exports providing some cushion against any negative impact from international trade in goods.

Capital formation fell by 25% last year, largely due to a big fall in Intangibles, although building and construction also declined, with residential contruction down by 7.5%. We expect some modest growth in the latter this year but a further fall in Intangibles contributing to a 9% contraction in capital formation.

Retail sales were notably weak last year, rising by just 0.5% and only 0.1% ex cars, so consumer spending shifted towards services. Nonetheless , personal consumption grew by only 2.3%, despite a strong rise (over 7%) in disposable income and a big decline in the CPI inflation rate, to 2.1%. Households continued to add to their already large stock of liquid assets held in bank deposits. The heightened degree of economic uncertainty may well continue to dampen consumer spending and we forecast a 2% rise this year with a 2.5% increase in modified domestic demand, marginally weaker than the 2.7% rise recorded last year.

The strong carryover of GDP into 2025 means that even if growth was zero in all four quarters the average rise in GDP would still be strongly positive, at 4.5%. US tariffs have been announced on Steel and Aluminium from the EU but not as yet on a broader range of products so it is still unclear how that will unfold but clearly has the propensity to not only hit Irish trade in goods but also dampen business and consumer confidence in general. However, as noted, the strength of service exports may offer a cushion to some degree and we expect Irish GDP to grow by 5% this year.