Iran's Economic Outlook- April 2017

The Iranian economy experienced a strong recovery in 2016 as a result of sanctions relief, following a 1.8% contraction in 2015. However, growth prospects in the medium term are expected to be modest due to near capacity oil production and weak non-oil sector activity. The latter will not pick up unless FDI recovers, the economy reconnects with the international banking system, and more progress is made in implementing domestic reforms. Unemployment has ratcheted up and inflationary pressures have started to increase.

In the medium term, with some recovery in investment growth, Iran’s economy is expected to experience moderate growth rates, at slightly over 4%. The contribution of exports will diminish, as spare capacity in the oil sector is utilized and the increase in oil production decelerates. On the production side, the revival of non-oil industrial production is expected to be the main contributor to overall growth; agriculture and service sectors are projected to grow by around 4 and 3 percent, respectively. The gradual change in the composition of growth could also help increase employment due to higher job elasticity in these sectors.

GDP growth in the first half of the Iranian calendar year (ending on March 20), reached 7.4% Year Over Year (yoy). The boost in growth was largely a result of the oil sector’s bounce back, both in production and exports, following the removal of sanctions in January 2016 through the JCPOA. However, economic activity seems muted in non-oil sectors (0.9% yoy growth in the first half of 2016) as the delay in the Iranian banking sectors’ integration with the global banking system continued to impede FDI and trade.