Ireland’s economy contracted in the three months through June following a first-quarter surge, and faces an uncertain future as U.S. tariffs rise, while the government plans to ramp up its investment spending.

A surge in exports of pharmaceuticals to the U.S. led Ireland to far outstrip the growth rates of other rich economies in the three months through March, with gross domestic product expanding by 7.4%, the equivalent of an annualized rate of 33%. By contrast, the U.S. economy contracted over the same period.

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However, much of that surge was driven by U.S. businesses building stocks ahead of anticipated tariff increases. As that driver ran out of steam in the three months through June, GDP fell by 0.1% from the previous quarter.

“This was driven by a decrease in the multinational dominated sector of Industry,” said Enda Behan, a statistician at the Central Statistics Office.

That turnaround in Irish growth is likely to be a headwind for the eurozone as a whole, which had a stronger-than-expected start to the year, but has faced higher tariffs on its exports to the U.S. since April.

Economists surveyed by The Wall Street Journal expect figures to be released Wednesday will record a small decline in eurozone GDP in the three months through June.

Further ahead, that headwind may build. President Trump has threatened to impose high tariffs on imports of pharmaceuticals from Ireland in an effort to persuade U.S. businesses to make more of their drugs back home.

While a deal agreed Sunday between Trump and European Commission President Ursula von der Leyen sets a tariff of 15% on many imports to the U.S. from Europe, the duties on pharmaceuticals don’t appear to have been settled.

Attracting U.S. businesses that seek access to the wider European Union has been a central part of Ireland’s economic strategy for half a century. But over recent years, much of the output of U.S. pharmaceutical makers based in the country has been intended for the U.S., partly as a way of lowering tax bills.

So while tariffs on the scale proposed by Trump would weaken Ireland’s pharmaceutical industry, they would likely not destroy it, with exports to the rest of Europe and further afield continuing as before.

“More than half of Ireland’s pharmaceutical exports would not be affected by U.S. tariffs because they go to other countries and the sector should continue to be internationally competitive even if the U.S. imposes tariffs,” said Andrew Kenningham, chief European economist at Capital Economics.

As with the much-larger Germany, one of Ireland’s responses to the economic threat from the U.S. is to ramp up spending on its frayed infrastructure.

Ireland is facing a significant shortage of housing, and the networks that are needed to deliver the water and power new homes will need. Its capital city may be Europe’s technology hub, but it lacks a rail link to its airport, which is standard elsewhere. It has no subway, and its buses still take coins as payment.

“A shortage of infrastructure in key areas is limiting the growth potential of the economy,” economists at the Central Bank of Ireland wrote in a June.

To remedy these deficiencies, the government Tuesday announced a 34 billion euro increase in investment spending to more than 112 billion euros for the five years from 2026.

“By any measure, this will represent the largest investment in economic and social infrastructure in the history of the state,” said Prime Minister Micheál Martin. “This money will go directly to addressing a range of issues critical to our future.”

Unlike Germany, it will not have to borrow to pay for the new investment, since it can draw on at least 13 billion euros of back taxes that the European Union deemed Apple liable to pay, as well as the proceeds from the sale of its remaining stake in one of the banks it acquired during the global financial crisis.

However, finding the workers to build the needed infrastructure has been a problem, with the unemployment rate at 4% in June, just above its record low. An economic slowdown prompted by tariffs, while unwelcome, might free up some needed labor.

“If economic growth slows materially, then this investment could be absorbed with a lower risk of excess demand and inflationary pressures,” the central bank said.

Write to Paul Hannon at paul.hannon@wsj.com

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