Global economic activity is being shaped by two competing forces, the Iran war and the positive impact of AI (artificial intelligence), the International Monetary Fund (IMF) has said.
In its latest assessment, the Washington-based institution paints a mixed picture of the global economy with two major economic forces “pushing in opposite directions”.
While the negative supply shock induced by war in the Gulf on commodity prices, inflation expectations and financial conditions has remained “relatively limited”, the IMF cautioned the fallout from higher energy prices and supply-chain disruptions has still to fully play out.
The warning comes amid another breakdown in the US-Iran truce triggered a fresh jump in oil prices as US President Donald Trump claimed the ceasefire deal was over.
READ MORE
“The possibility of renewed Middle East conflict looms large and could extend commodity price volatility,” it warned.
This negative economic force is, however, being partly offset by “accelerated demand-driven momentum in the global technology cycle thanks to advances in AI and its adoption”, the fund said.
Overall, global growth is projected to be 3 per cent in 2026 and 3.4 per cent in 2027, down from an average of 3.5 per cent seen in 2024 and 2025.
This “modest slowdown” reflects the twin impacts of war and AI.
The IMF upgraded its forecast for inflation, indicating it expected global price growth to increase from 4.1 per cent in 2025 to 4.7 per cent this year before declining to 3.9 per cent in 2027.
The 9 per cent VAT rate has been welcomed by restaurants but does the hospitality sector actually need it?
“These projections indicate that the disinflation trend in place since the beginning of 2024 has stalled,” it said.
“Net energy exporters are partly cushioned by favourable terms-of-trade effects, whereas net energy importers experience a more pronounced drag from higher energy prices unless they are lifted by technology-related activity,” the IMF said.
The euro zone economy is expected to grow by 0.9 per cent in 2026 and 1.2 per cent in 2027.
It noted that the forecast for 2026 was weaker than previously forecast “reflecting a sizeable negative carry-over from the first quarter, which is driven largely by Ireland”.
Irish GDP (gross domestic product) contracted sharply in the first three months of the year as the front-loading of exports into the US in 2025 to avoid tariffs unwound.
US growth is projected to be 2.3 per cent in 2026 and 2.2 per cent in 2027 with activity supported by fiscal policy, accommodative financial conditions and continued technology-related business investment.
As a net energy exporter, the war was having only a limited impact on the US economy.
The IMF’s report also contained a warning to countries about using “fiscal tools” to respond to higher energy prices.
“Energy-related fiscal support, especially price distorting measures, should be removed as the energy shock abates so as to preserve fiscal buffers,” it said.
“Fiscal policy should avoid broad-based subsidies, tax cuts and price controls, which are typically poorly targeted, fiscally costly and politically difficult to unwind,” it said.
In a recent report, the Irish Fiscal Advisory Council noted that the Irish Government has spent €5 billion in recent years on temporary fuel and energy supports.
