The domestic economy is expected to grow again in 2026, albeit at a softer pace, PwC Ireland has said, with rising inflation and declining consumer sentiment set to shape the outlook in the second half of the year.PwC has pencilled in a 2.5 per cent decline in Irish gross domestic product (GDP) this year, before a return to headline growth next year. However, economists consider GDP to be an unreliable metric due to the distorting impact of large intellectual property and aircraft leasing transactions by multinationals operating in the State. Due to these factors, headline GDP declined by 12 per cent in the first quarter of 2026. This contraction largely reflected a huge surge in exports over the same period last year as pharmaceuticals companies sought to get ahead of the new US tariffs regime. Modified domestic demand (MDD), a measure of growth that strips out activity by multinationals, is now expected to grow by 2.7 per cent this year, PwC said, down from 4.6 per cent in 2025.MDD will grow by 2.5 per cent in 2027 and 2028, pointing to a “steadier underlying growth path reflecting the risks posed by external uncertainties, inflation, and softening domestic momentum”, the Big Four firm said.Inflation in the Irish economy is expected to jump to an average of 3.1 per cent from 2.2 per cent last year before returning to 2.3 per cent next year, according to PwC.“This reflects continued price pressures, particularly in energy and food, driven in part by ongoing geopolitical tensions in the Middle East and associated volatility in global commodity markets,” the firm said. “However, inflation is projected to ease gradually over the medium term, returning to more normal, wider euro area trends as global price pressures stabilise.”The firm’s latest forecasts for the Republic’s economy largely echo recent reports from the Central Bank of Ireland and Economic and Social Research Institute (ESRI).How can tech offer solutions for obesity and weight management? Listen | 35:38Last month, the central bank increased its expectations for headline inflation in the economy in 2026 through to 2028.It now believes global energy prices are unlikely to return to where they were before the initial US-Israeli strikes on Iran in late February.Meanwhile, the ESRI increased its expectations for inflation in the Republic in 2026, while lowering its forecasts for consumer spending in its most recent quarterly economic commentary.Still, the think tank raised its growth expectations for the domestic economy. It is forecasting MDD to grow by 2.6 per cent this year, up from 2.1 per cent previously. That growth is being driven by investment in information and communication technology equipment, which has ballooned in recent months, as multinational technology companies pump money into data centres and artificial intelligence infrastructure, the ESRI said.