Iran’s economic engine is losing momentum. According to new data from the Statistical Center of Iran, the country’s gross domestic product (GDP) shrank by 0.4% in the first quarter of the current fiscal year (spring 2024). This marks the weakest quarterly performance since early 2021 and signals deepening challenges for the country’s growth outlook. The contraction stems largely from a 1.9% fall in gross fixed capital formation, a key indicator of investment in machinery, equipment, and construction. Economists view this decline as an early warning that Iran’s capacity to expand output in the coming years is eroding. Without new investment, existing capital stock depreciates over time, leading to slower production growth and weaker job creation.
Economic theory identifies three main drivers of growth: labor, capital accumulation, and total factor productivity (TFP)—a measure of efficiency and innovation. In Iran, however, growth has long depended heavily on capital formation rather than productivity gains or labor expansion. This imbalance leaves the economy vulnerable whenever investment slows. The new figures confirm this structural weakness. While labor participation has risen modestly in recent years, low skill levels, youth unemployment, and mismatches between education and market demand have prevented the workforce from becoming a strong source of growth. Meanwhile, productivity has stagnated amid sanctions, weak institutional quality, and limited technological advancement.
The detailed breakdown shows that investment in machinery and equipment dropped by 3.3% in spring—the steepest decline since 2021—while construction investment grew only 0.4%. With both components sluggish, the overall level of new investment barely covers depreciation. This matters because most of Iran’s capital stock—especially in oil, gas, and heavy industries—requires continuous renewal and modernization to maintain output levels. When investment dries up, production capacity gradually shrinks. The decline in capital formation has mirrored the broader slowdown in GDP over the past decade, underscoring how closely the two move together.
Structural Headwinds
Two structural headwinds are weighing on investment: volatile oil revenues and macroeconomic instability. Uncertain export earnings have limited public investment, while high inflation, currency depreciation, and political uncertainty have deterred private investors. Businesses face rising financing costs and unclear returns, discouraging long-term projects. At the same time, the weak pace of investment affects the labor market. Employers struggling with low profitability cannot offer higher wages, while workers face limited job opportunities. As investment and productivity both decline, overall income growth stalls, feeding back into weaker demand and reinforcing the slowdown.
The government’s Seventh Development Plan targets an ambitious 8% annual growth rate, but the first quarter’s figures make that goal increasingly unrealistic. With both fixed investment and output contracting, Iran risks entering a cycle of underinvestment and stagnation. To revive growth, policymakers need to restore investor confidence and stabilize macroeconomic conditions. Encouraging private sector participation, improving governance, and facilitating access to finance could help offset the drag from declining oil revenues. For now, however, the warning light is on: without renewed investment, the fuel that powers Iran’s economic engine is running out.
