Look under the hood. There are ‘echoes of 2006’ in the Irish economy

A bit like a footballer who celebrates getting on the World Cup scoresheet after blasting the ball past their own keeper, Donald Trump says his putative peace deal with Iran has averted a “worldwide depression”.

The deal reached last weekend is little more than an agreement to further negotiations between the two sides. As with everything involving the White House at the moment, a great deal of scepticism – even pessimism – is warranted.

Of course, any depression would have been of Trump’s making given his decision to join with Israel in bombing Iran in February, sparking a wider Middle East conflict and a blockade of the Strait of Hormuz , a vital channel for global trade.

It is far too early to say whether peace will hold. It’s not certain even that the current administration is competent enough to resolve a Middle East crisis of its own making, one that has cost thousands of lives in the region and caused immeasurable harm to the global economy through higher energy prices and damaged oil and gas infrastructure.

This is the landscape in which the Central Bank of Ireland published its latest forecasts for the Irish economy this week. It came a week after the Irish Fiscal Advisory Council (Ifac) published its latest fiscal report, which restated the watchdog’s long-running concerns with the Government’s approach to the public finances.

Ireland’s biggest risks, as the economists see them, can be put into two main baskets: the geopolitical and the domestic or public financial.

Into the former category we can put a plethora of vitally important factors – global oil prices, trade barriers, war-related supply-chain disruptions – over which Irish politicians and the State itself have little or no control.

Certainly there is debate to be had and political wrangling to be done over the supports that will need to be put in place to shield the most vulnerable households and businesses from the worst effects of an increasingly fraught global environment. By and large, little can be done in Leinster House or on Merrion Street to change the risk profile.

At the launch of the Central Bank’s first financial stability review of 2026 late last month, governor Gabriel Makhlouf said that if he had to rank them, the geopolitical storm engulfing the global economy was a top concern because “we have zero control over that”.

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He was speaking well before the United States and Iran signed a memorandum of understanding that the Trump administration claims will guarantee the reopening of the Strait of Hormuz. “It’s not obvious today that there’s a path to returning all of that to some sort of normality,” Makhlouf said in May.

That path remains murky one month later, despite last weekend’s putative agreement. On Thursday, the Central Bank published its second quarterly economic bulletin of the year, containing a set of forecasts for the Irish economy that provide a fuller account of the impact of the war in Iran.

Its last figures – published in March, just weeks after the first US-Israeli strikes and Iran’s retaliation – set out several potential scenarios for the trajectory of global energy prices and, in turn, Irish inflation.

Now, the bank’s economists say there is no going back to the baseline. Even if the Strait of Hormuz reopened fully in the coming days, the assumptions made in March simply don’t hold any more. What’s more, the oil and gas market tremor could continue to send out shock waves as the year progresses.

“It’s unlikely that we will very quickly return to the levels, the volumes of activity going through the Strait of Hormuz,” said Martin O’Brien, head of the Central Bank’s economic analysis division. That’s bad news for oil prices, and equally so for shipping prices, which eventually bleed into the prices that Irish consumers pay for the wide range of goods that we import into the country.

It’s against this backdrop that the forecasters now expect general inflation in the Irish economy to run at an average of 3.5 per cent this year, up from 2.9 per cent in the Central Bank’s March forecasts. In a more adverse scenario in which the Strait remains closed for longer, Irish inflation could reach an eye-watering 5 per cent this year.

So far, the increase in the pace of inflation has been driven by energy prices, specifically soaring liquid fuel prices (petrol, diesel, home heating oil), which contributed to a 15.3 per cent and 11.9 per cent spike in the basket of energy goods in April and May, respectively.

Worryingly, however, there is evidence that the impact of this shock is moving into other areas of consumer spending. The issue is that even if global oil and gas prices retreat over the coming weeks and months, the butterfly effect will be felt in the price of other staples.

“In particular,” said Robert Kelly, director of economics and statistics at the Central Bank, “if you look at the likes of food, for example, we…