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 Middle East 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 is still to fully play out.The warning comes amid another breakdown in the US-Iran truce and a jump in oil prices with US President Donald Trump claiming the ceasefire deal was over.“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.[ IMF warns Government not to stoke Ireland’s full-capacity economy with needless spendingOpens in new window ]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 in 2026 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? Listen | 39:12“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 favorable 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 area economy is expected to grow by 0.9 per cent in 2026 and 1.2 per cent in 2027.[ Household supports in Budget 2027 must be temporary and target most vulnerable, says IMFOpens in new window ]It noted that the forecast for 2026 was weaker than previously forecast “reflecting a sizable negative carryover 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 frontloading of exports into the US in 2025 (to avoid tariffs) unwound.US growth is projected to 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.