The global economy in a race against time
It was in the cards that 2026 would be another dramatic year for the world economy. Current times are unpredictable and, entering this year, we flagged a number of economic, political and geopolitical risks. Now, we know which one has had the greatest impact on the economy, at least so far – the conflict in the Middle East, which has plunged the world into an energy crisis that is the worst since at least the oil crises of the 1970s. Geopolitical tensions have been a persistent feature of the global landscape, with recurring conflicts in the Middle East and, more recently, Russia’s invasion of Ukraine. While these troubles have caused concern and great suffering, since oil nevertheless continued to reach the world market, large and lasting price increases have been avoided. This time is different, however. When the attacks by the United States and Israel began on 28 February, Iran’s response in closing the Strait of Hormuz choked an artery of the global energy system. The world market is now losing millions of barrels of oil and other critical commodities every day, despite attempts to mitigate the shortfall through rerouting shipments and releasing strategic reserves. While there is a ceasefire at the time of writing, the war is not over. How long the conflict will last, and when Strait of Hormuz will reopen, are unknown.
What is clear, however is that economic risks will rise the longer the disruption persists and the more infrastructure is damaged before a resolution is reached and the strait reopens. In this edition of Nordic Outlook, we make the optimistic assumption, supported by futures prices, that the strait will gradually reopen before the summer, although it is difficult to determine how the negotiations are proceeding and whether this assumption is realistic.
The economic risks from the crisis essentially consist of two parts – inflation risks and growth risks. Elevated oil prices risk feeding through to the broader economy, raising concerns about a potential return to the inflationary pressures seen in 2022 and a need for central banks to embark on rate hikes again. This report argues that, while such a scenario cannot be ruled out, it is not very likely, as conditions are very different this time. The second part – the growth risk – is more significant currently. We generally trim our growth expectations compared to January; however, with our assumption of an end to the conflict within a few weeks, we do not see any major declines or recession risks.
While the war in the Middle East and the energy market crisis currently dominate the analysis, they are not the only important factors. AI investments in the US, defence investments in Europe and household consumption in Sweden will also have a major bearing on how growth unfolds. The world market also remains affected by the US’ new trade policy and by politically and strategically (rather than economically) motivated trade decisions. In February, the Supreme Court of the US ruled that parts of Trump’s tariffs were illegal. However, the failed tariffs were quickly replaced by new ones and these will probably remain at around current levels for a long time to come. Add to that competition for resources and the quest for strategic independence, tensions within NATO, the EU’s attempts to increase its competitiveness, a new incoming Chair at the Federal Reserve, China's trimmed growth forecasts, and markets tossed between hope and despair, and the stage is set for an eventful continuation of 2026.
This edition of Nordic Outlook also offers in-depth themes that address the following issues:
- Energy – the world is living on borrowed time
- Inflation and the impact of rising energy prices
- Trade – the EU’s new choices and the balance between free trade and strategic autonomy
Wishing you an informative and insightful read,
Jens Magnusson
Chief Economist
Daniel Bergvall
Head of Economic Forecasting