One way to think about forecasting what may happen in the year ahead was outlined by then US secretary of defence Donald Rumsfeld before the Iraq War. He perplexed journalists at a press conference when he appeared to mangle the English language but what he said was perceptive.
Rumsfeld deconstructed forecasting and risk into three distinct scenarios. There are “known knowns”, meaning things we know. There are also “known unknowns”, risks that we don’t yet appreciate but can predict with a certain amount of accuracy because we’ve seen them before. And there are “unknown unknowns”, risks that are so novel and unexpected that we have no idea where they will come from but these may have a massively disproportionate effect.
Keep that framework in your head as we consider how the economy might behave in the year ahead, and what risks we should take into account.
The known knowns are the things we know. In the economic sphere, this is our central case. Given how the economy has been operating in the past few years, we can be sure that the housing crisis will continue. This prediction is based on the fact that the building industry can only build – best case – about 40,000 homes, while the demand is running way ahead of this and we already have an acute dearth of houses.
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Immigrants are essential for the country to function but they are also a source of extra demand, because they need a roof over their heads like everyone else. Any easing of pressure on the housing market must have demand as well as supply components. Unless there is a significant fall in immigration, which is unlikely in the absence of a deep recession, the Irish housing debacle will continue.
As long as this remains the case, emigration of young Irish people will continue to be a counterintuitive feature of Irish life. Typically, if the economy is growing strongly, local people will stay at home to benefit from the fruits of this growth – career opportunities, decent wages and the general upbeat vibe associated with the good times. But because of our inability to build enough affordable apartments for younger people, they are leaving in significant numbers which is not only an emotional familial strain, but it’s also a net drain to the State as many of the people leaving are highly educated. There’s nothing to suggest this trend will not continue in 2026.
Added to this is the disruptive impact of multinational corporation tax on the inherent balance of the economy. The billions of euro flowing into the country from American multinationals is driving inflation. It stands to reason. In a small economy operating at full tilt, prices are highly sensitive because everything is operating at maximum capacity. If demand increases, even modestly, prices surge.
Now think of the extra billions of euros cascading into this fragile mix. The new American money comes into the coffers of the State and this leads to a smash-and-grab mania, where every public body tries to nab a bit of this fresh loot. Government spending goes through the roof because there is no budget constraint and rather than getting a boost to output, most of this new money reappears in the economy as higher prices, driving an affordability crisis.
Again we end up with a counterintuitive outcome, whereby lots of new revenue in the government’s hands should make living in the country easier, but it makes it more difficult. The upward pressure of total demand in the economy caused by the US windfall is not leading to the delivery of more homes, hospitals, metros or railways. Instead it is disappearing into overall inflation, with the result that budgets are missed, contracts go over cost and prices of everything from utility bills to weekly groceries nudge upwards. Ironically, there is simply too much money in the economy, not too little, and the government apparatus is grabbing it and doling it out, inefficiently.
This leads to a gap between costs and incomes. Incomes in the rest of the economy are limited by profitability, which in turn is a function of productivity. As most Irish people work in relatively low productivity jobs, like service industries, their incomes are capped yet their costs are rising all the time, so they are squeezed. In a recent column, I calculated that a family needs about €4,400 per month just to cover essentials – that’s €52,800 net per year to participate in society. The official poverty line is €33,600 for this household type. So there’s a €20,000 difference. As a result the country looks rich on paper but, in reality, is poor in large parts.
What might be the impact on domestic demand if Ireland qualify for the World Cup?
This gap is not likely to be bridged in 2026 because our administrative class has shown no ability or willingness to correctly diagnose what is actually happening in the economy, where demographics meets housing policy, or where the US-sourced cash bonanza meets the economy’s ability to deliver at full capacity. Until we see someone from the administration – be they politician or senior public servant – joining the dots, there is no reason to believe that anything will change and it is highly likely that Ireland in 2026 will feel like a slightly more asphyxiated version of 2025.
If that was the known knowns, what about the known unknowns?
An interesting one will possibly come to pass in June 2026. What might be the impact on domestic demand if Ireland qualify for the World Cup?
Troy Parrott’s five goals in three games caused a run on Ireland football shirts. If anything shows us the potential impact of the Boys in Green on the economy, it is the shortage of Ireland jerseys at Christmas. Santa was flummoxed. Like Irish goals before Parrott’s intervention, Republic of Ireland tops were impossible to come by, even for the most intrepid present hunters. Children small and big wanted one. Imagine a repeat of Italia ‘90 if we quality for USA 2026.
As known unknowns go, the effect of the football team is one to watch. What goes for fans, fandom and the national mood goes for the economy. As one of the known unknowns, success in the beautiful game would surely be the most welcome surprise.
