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Iran recession: Sluggish growth under severe pressure from geopolitical tensions, Covid hangover

By Ryan Hogg

Edited by Jekaterina Drozdovica

15:27, 22 December 2022

Iran recession
Iran’s recession history has largely been dictated by its relationship — or lack thereof — with the global economy. – Photo: Shutterstock; Maxx-Studio

It’s difficult to know where to look first when observing a stockpile of issues for the Iran economy. High inflation and continued pressure from sanctions have conspired to devalue the country’s currency.

Now, huge social unrest threatens to tip Iran into crisis. An Iran recession as the next economic watermark appears increasingly possible.

What is a recession?

A recession is technically defined as two consecutive quarters of negative economic growth. After this point, an economy stays in a recession as long as that economic growth remains negative. 

While a seemingly arbitrary marker, recessions are the best and one of the earliest indicators that show an economy is in distress. A contraction at the macro level indicates falling activity across the economy. A recession indicates that the fall is long enough to be considered a structural, possibly endemic issue within a country. 

Recessions can be caused by external shocks, like a financial crisis, or they can be internal to the economy, with output contracting in line with the natural business cycle. That occurs when interest rates are hiked to contain inflation accrued during economic expansion, softening demand

A country’s ability to fight a recession can be complicated by several factors, including inflation, the health of its key industries, exposure to geopolitical risks and the effectiveness of monetary and fiscal policy to respond to a downturn.

Recessions in the US last an average of 17.5 months, according to Kiplinger.

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Iran recession history

Iran’s recession history has largely been dictated by its relationship with the global economy. 

The country emerged from a fairly brutal recession that gripped the economy in 2019 and 2020 in the wake of the collapse of the nuclear deal which triggered a mini Iran economic crisis. Gross domestic product (GDP) was estimated to have contracted by 6.8% in 2019/20, with non-oil GDP falling by 8%. 

And while the World Bank estimated that GDP grew at 3.4% in 2020/21, it warned in its April economic outlook that recessionary pressures persisted.

“The continuation of sanctions, subdued net capital formation particularly in the oil sector, energy shortages, global inflation, and the scarring effects of the pandemic on the labor market limit growth prospects,” the bank wrote.

Non-oil GDP in Tehran was estimated to have grown at 3.4% in the first half of 2022, the Tehran Times reported via the Statistical Centre of Iran (SCI), suggesting an Iran recession is yet to unfold.

Is Iran in a recession right now? 

Based on the latest available data, it would not appear that Iran is in a recession, or that an Iran economic collapse is imminent.

But the country has been vulnerable to the same economic headwinds seen across much of the globe.

Iran’s economic problems are compounded by steep inflation, Russia’s invasion of Ukraine and wider supply chain pressures left over from Covid-19 restrictions.

The consumer prices index (CPI) was last measured at 48.1% in November, according to the Tehran Times. Higher import costs have been putting pressure on food prices in the country. 

There were expectations that price rises could exceed 51% by the end of 2022, putting more pressure on businesses and hitting consumer spending.

Inflation can help push a country into a recession in a couple of ways. Firstly, it diminishes consumer purchasing power, hitting demand for goods and services and accordingly output, particularly if wage rises don’t match price jumps. 

Secondly, it can force a central bank to push up interest rates, reducing demand by making borrowing more expensive and saving more attractive.

Another key driver of inflation this year has been oil, with Russia’s war in Ukraine and sanctions pushing the price up. For an oil exporter like Iran, this has been a welcome boost to the economy.

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Between March and July this year, Iran saw a 580% increase in Treasury income, Reuters reported, owing to a spike in the price of oil following the beginning of Russia’s invasion of Ukraine. 

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But price pressures — and any positive spin they may provide — have become a side note to a rapidly descending Iran crisis. 

Widespread protests following the death of 22-year-old Mahsa Amini in the custody of Iran’s morality police have rocked the country. Nearly 500 civilians are thought to have been killed in protests as Iran’s government clamps down with execution orders for some of those involved. 

“In the medium term, if protests continue, the economy will stagnate, unemployment will increase and there will be new grievances that will lead to more protests and uncertainties,” strategy consultant Bijan Khajehpour told Energy Intelligence.

Domestic unrest is adding to a tough underlying context of renewed sanctions that have plagued Iran since the reinstatement of punishing sanctions by the Trump administration in May 2018 after he ended the countries’ nuclear deal

And while societal unrest puts its own pressures on the domestic economy, continued unrest further reduces the likelihood that the harshest of sanctions imposed on Iran are lifted.

Sanctions helped push Iran into a recession in 2019 and 2020, and won’t help the economy as it fights additional fires next year.

An October forecast by the World Bank, which cut Iran’s growth outlook to 2.2% in 2023 following 2.9% growth in 2022, suggested headwinds on the horizon for the economy.

“Risks to Iran’s economic outlook remain significant. Intensified climate change challenges such as more frequent floods, droughts, and dust storms, as well as energy shortages could significantly impact the economic outlook,” said the bank in its economic overview of Iran.

“These challenges coupled with the recent inflationary pressures could add to pressures on the most vulnerable and pose a potential risk of social tensions, particularly since modest growth is expected to generate limited job opportunities.”

The World Bank added that renewed Covid-19 outbreaks, further deceleration in global demand and increasing geopolitical tensions could each conspire to bring down economic growth. This might help threaten an Iran recession.

“On the upside, the projected growth outlook could be significantly stronger if economic sanctions were to be removed. Higher oil prices could also improve fiscal and external balances further,” the World Bank concluded.

Impact on Iran’s rial

Social and economic turmoil has seen Iran’s currency take a battering in the second half of 2022, a trend that could plunge the country’s economy into a deeper Iran crisis.

Iran has three foreign exchange rates, with the “official” rate subsidised by the Iranian government. This complicates analysis. However, reports suggested that the direction of travel for the Iranian rial has not been positive. 

The rial lost 18% against the dollar on informal markets between the beginning of protests in September and mid-December, sources told Bloomberg. AP reported that traders in Tehran were trading the rial at around 370,000 to the US dollar in mid-December, compared to 32,000 rials to the dollar in the wake of the Iran nuclear deal in 2015.

As Iran’s currency devalues, it makes goods more expensive to import, increasing inflation.

Iran economy forecast for 2023 and beyond

Analysts and forecasting houses appeared aligned in the assumption that an Iran recession is unlikely in the immediate future, although the country’s dynamic economic and social context gives less credence to that assumption.

The World Bank’s latest Iran economic outlook of 2.2% GDP growth in 2023 suggests that the country will avoid a recession, but headwinds are evident.

An Iran economic forecast by Trading Economics, as of 22 December, suggested that Iran’s economy will expand by 1% in 2023 and 2% in 2024.

In its October economic outlook, the IMF forecast Iran GDP to grow by 3% in 2022 and by 2% in 2023. In 2027, the group again predicted GDP to grow by 2%.

Final thoughts

Note that analysts and algorithm-based predictions about an Iran recession can be wrong. Always conduct your own due diligence before trading looking at the latest news, fundamental and technical analysis, and a wide range of commentary.

Past performance does not guarantee future returns. And never trade more money than you can afford to lose.

FAQs

Is Iran's economy collapsing?

Iran’s economy is not collapsing. It is experiencing pressure from inflation, sanctions and social unrest.

Is Iran in recession?

Iran is not currently in a recession, based on the latest data, thanks in large part to oil exports.

How long does a recession usually last?

A recession lasts an average of 17.5 months, at least in the US, according to Kiplinger.

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