Iranian Economy Buckles Under Blockade-Driven Recession

The Iranian economy is suffering significantly due to the ongoing war, which has led to a blockade that's choking off oil exports. According to Capital Economics, oil exports have fallen close to zero in July, an income stream worth roughly 11% of GDP on an annualised basis. This has infected the whole economy and is particularly painful for households.

The war has hit Iran through four channels at once: output, oil income, inflation/real wages, and the fiscal base. Five months of conflict have turned a struggling economy into a deepening recession, simultaneously cutting foreign-currency earnings, driving up prices, and crushing household purchasing power.

The IMF now expects Iran's economy to shrink 5.4% in 2026, while consumer-price inflation averages 68.9%. The deterioration is substantially worse than expected before the fighting began, with the World Bank forecasting a contraction of about 1.5% in 2026/27.

Households are being hit hard by price increases, particularly for food and dairy products. Official figures show year-on-year headline inflation reaching 71.8% in March, while food, beverages, and tobacco rose 112.5%. The government has raised the statutory minimum wage by about 60%, but this increase has failed to keep pace with the cost of many necessities.