Iceland's government will detail its economic policy and temporary actions aimed at countering uncertainty and global oil price increases at a press conference today, according to major media reports. The Prime Minister stated these measures are intended to address the volatility, while the country's growth strategy for the next decade will also be presented. After the weekend, Finance Minister Daði Már Kristófersson will present a financial plan to Parliament for 2027 to 2031, which includes balanced budgets in 2027 for the first time in nearly a decade and surpluses from state operations each year of the plan, major media reports indicate.
Inflation in Iceland, which measured 5.1% in October, stems primarily from a lack of an effective social contract in the labor market, according to Central Bank Governor Ásgeir Jónsson. Jónsson cited a 1982 article by the Central Bank's chief economist, Bjarni Bragi Jónsson, which argued that this lack of a social contract is the root of inflation. The main reason for not always achieving good results in monetary matters is the failure to ensure an effective social contract aligned with a 2.5% inflation target, leading to widespread indexation in the economy, Jónsson added. A tripartite dialogue will be held between the Icelandic Confederation of Labour, the Confederation of Icelandic Enterprise, and the authorities to curb inflation, though its structure and immediate measures remain unspecified.
Monetary policy execution in Iceland is essentially the same as in other developed countries and all indicators show it is well targeted in the financial system, Ásgeir Jónsson stated. The Monetary Policy Committee of the Central Bank of Iceland has decided to lower the Bank's interest rates by 0.5 percentage points, with the key interest rate now at 8.5%. In Iceland, GDP was down by 1.9% year-on-year in the first half of 2024, with GDP projected to be flat year-on-year in 2024, rebounding to nearly 2% in 2025 and averaging 2.5% per year in the latter half of the forecast horizon. Output growth during the forecast horizon will be driven largely by domestic demand—private consumption in particular, while job numbers have fallen and unemployment continues to inch upwards, with the output gap projected to close and a slack to open up in late 2025.
The global economic turmoil originates from a U.S.-Israeli war on Iran and Tehran's retaliatory strikes, which have upended global financial and energy markets, raising concerns of a global economic crisis or recession, according to research from five sources. Since the U.S.-Israeli strikes on Iran began on February 28, Tehran has launched ballistic missiles targeting Israel, U.S. military bases, oil depots, and other infrastructure across the Gulf region. This week also marked the first anniversary of Hamas's terrorist attack on Israel, with fighting intensifying in the twelve months since, and the latest development saw Iran launching ballistic missiles into Israel—which caused minimal damage—and Israel moving troops into southern Lebanon.
Iranian attacks on vessels in the Strait of Hormuz have dramatically reduced traffic in the channel, through which about 20% of global oil and gas supplies transit. As of Monday morning, Brent crude was priced at $106 per barrel, up more than 40% from $72 per barrel on February 27. Liquified natural gas prices have risen by almost 60% since the start of the war, according to Muyu Xu, a senior crude oil analyst at Kpler. On March 2, QatarEnergy suspended its LNG production after an Iranian drone attack, straining the global LNG market. Prices of refined products have seen significant increases, and that trend is expected to continue if energy flows through the Strait of Hormuz remain largely shut, Xu noted.
The war has caused a systemic collapse of the Gulf Cooperation Council economic model, research indicates. Arab states of the Persian Gulf as well as Iran rely on the Strait of Hormuz for their energy exports and grocery imports, with only Saudi Arabia and the UAE having alternative, albeit limited, routes. Following the closure of the Strait of Hormuz on March 4, 2026, oil and LNG exports were stranded, causing Brent Crude to surge past $120 per barrel and forcing QatarEnergy to declare force majeure on all exports. The oil production of Kuwait, Iraq, Saudi Arabia, and the United Arab Emirates collectively dropped by a reported 6.7 million barrels per day by March 10, and by at least 10 million barrels per day as of March 12.
The maritime blockade triggered a concurrent grocery supply emergency across Gulf Cooperation Council states, which rely on the Strait for over 80% of their caloric intake; by mid-March, 70% of the region's food imports were disrupted. Retailers like Lulu Retail airlifted staples, resulting in a 40–120% spike in consumer prices. The crisis has shifted from a fiscal contraction toward fears about a humanitarian crisis following Iranian strikes on desalination plants—the source of 99% of drinking water in Kuwait and Qatar.
Globally, the 2026 Iran war, including the closure of the Strait of Hormuz, has led to what the International Energy Agency characterized as the largest supply disruption in the history of the global oil market. The impact of the conflict echoes the 1970s energy crisis through acute supply shortages, currency volatility, inflation, and heightened risks of stagflation and recession. Interest rate reductions were expected to be postponed or conversely increased in light of higher inflation caused by supply shortages and speculation. Stock markets experienced declines globally and there was a global bonds market sell-off. In the week ending October 4, crude oil prices soared 9.1% on concerns that Iran's oil fields would be targeted, the biggest advance since March 2023.
However, given the long history of regional conflicts, there is not a high likelihood of major ripple effects on global growth or equity markets from the current Middle East conflict, research suggests. There is a very low likelihood of war spilling over into major economic centers like the U.S., Europe, Japan, and China, meaning the impact on global GDP will be negligible. Looking back at 54 crisis events since 1907, the Dow Jones Industrial Average has fallen an average of -7.1% during the crisis period, with an average gain of +9.7% in the six months that followed. Looking back at conflicts since 1925, only World War II resulted in a bear market. Since the fighting broke out one year ago, the S&P 500 and global stocks as measured by the MSCI World are up approximately +30%.
Iran's recent barrage of missiles resulted in market volatility in both equity and oil markets, as did Hamas's initial attack on October 7, 2023. The regional aviation sector, including Emirates and Qatar Airways, faced a near-total cessation of operations due to multi-national airspace closures, causing widespread disruption to global air travel. Analysts have noted a profound shift in the region's long-term economic narrative, with Gulf states unlikely to sustain high levels of investment spending during or after the war. The Qatar-funded Middle East Council on Global Affairs suggested the war has irreversibly shaken the region's image, exposing fragility beneath the facade of rapid economic transformation. Sinem Cengiz, a Kuwaiti journalist, conveyed that the immeasurable social and psychological impact in economic, political, and security spheres were unlikely to fade.
Trading partner GDP growth is expected to inch upwards from 1.4% in 2024 to 1.7% by 2026, with robust output growth in the U.S. and a relatively poor outlook for the eurozone. Global inflation averaged 2.2% in the third quarter of 2024 and is projected to fall to 2% late in 2025. Specific projections for global economic growth and inflation in light of the Middle East conflict, beyond these general risks, remain unclear.
The government meeting today before the press conference is the first to be fully electronic, according to major media. The exact temporary economic actions Iceland will announce to counter inflation and global oil price increases, as well as how the tripartite dialogue will be structured, are not yet known. The current status of the Strait of Hormuz closure and its exact impact on global oil and LNG supplies also remains uncertain, though about 84% of crude oil and 83% of LNG that passed through the Strait of Hormuz in 2024 was bound for Asia, with China, India, Japan, and South Korea accounting for nearly 70% of oil shipments and about 15% bound for the rest of Asia, according to data from the U.S. Energy Information Administration.
Conflicting reports exist on oil price levels during the conflict: as of Monday morning, Brent crude was priced at $106 per barrel, but following the closure of the Strait of Hormuz on March 4, 2026, Brent Crude surged past $120 per barrel, indicating differing assessments of the severity of price spikes. The timeline of events is also unclear, with some reports citing U.S.-Israeli strikes on Iran beginning February 28 and Iranian attacks on March 2, while others refer to a 2026 Iran war and closure of the Strait of Hormuz on March 4, 2026, suggesting different timeframes or hypothetical scenarios. If the conflict is short-lived and Iranian attacks cease, oil and LNG prices would fall back sharply with Brent crude reaching $65 per barrel by year-end, according to a March 9 report by Neil Shearing and his team at Capital Economics. In case of a longer war, oil prices would rise further to around $130 per barrel in the second quarter, the same report projected.