IMF expects modest 3% growth as the Iran war is dragging down the economy while AI is boosting it

The IMF downgraded its original 3.1% outlook for the year it announced in April to 3% this month, down even further from the 3.5% it expected in 2026.

The International Monetary Fund on Wednesday modestly downgraded its outlook for the world economy this year, citing the energy shock caused by the Iran war. But the fallout from the conflict is being partially offset by booming investment in artificial intelligence and other technologies.

The IMF now expects the global economy to expand by a sluggish 3% in 2026, down from 3.5% last year and from the 3.1% it had forecast for this year back in April. The fund expects worldwide growth to rebound to 3.4% next year.

Iran responded to U.S. and Israeli attacks Feb. 28 by shutting down the Strait of Hormuz, through which a fifth of the world’s crude oil and natural gas passes. Energy prices soared, squeezing businesses and consumers. The IMF now expects oil prices to be up nearly 32% this year and for global consumer prices overall to increase 4.7% in 2026. That would be up from 4.1% in 2025 and would mean that two years of progress against inflation has stalled.

The IMF forecasts assume that the Strait of Hormuz reopens later this month — even though U.S. strikes on Iran resumed and President Donald Trump declared Wednesday that a ceasefire with Iran was over. They also assume that commerce through the strait returns to normal by next March.

“The world economy has weathered the shock from the war better than feared,″ Petya Koeva Brooks, deputy director of the IMF’s research department, told reporters Wednesday. The economic damage from the energy shock has been limited partly because countries could draw on existing oil stockpiles and because oil-exporting countries outside the Persian Gulf stepped up production.

Countries that produce and export their own energy and that benefit from AI investment are insulated from the war’s economic damage. Among them is the United States. The IMF expects the U.S. economy — the world’s largest — to grow a solid 2.3% this year, up from 2.1% in 2025 and unchanged from the April forecast. President Donald Trump’s 2025 tax cuts, big gains in productivity and a strong stock market are also giving the American economy a lift.

The 21 European countries that share the euro currency, hit hard by higher energy prices, are collectively forecast to grow just 0.9% this year, down from 1.4% in 2025.

China, the world’s No. 2 economy, is expected to expand 4.6% this year, down from 5% in 2026 but a bit faster than the IMF had expected in April. Weighed down by higher energy prices and a property market collapse, the Chinese economy is getting offsetting help from public works spending, a surge in high-tech manufacturing and booming exports.

India is once again forecast to be the world’s fastest-growing major economy, advancing at a 6.4% clip (down from a sizzling 7.7% last year) on strong consumer spending.

The IMF is a 191-nation lending organization that works to promote economic growth and financial stability and to reduce global poverty.

This story was originally featured on Fortune.com