Iran's financial markets are entering a period of heightened uncertainty, with economists saying the country's political outlook—particularly the future of negotiations between Tehran and Washington—will be the main force shaping asset prices over the coming months.
Speaking at the Iran Economy Outlook 1405 (March 2026–March 2027) conference, analysts said investors should prepare for three possible scenarios, ranging from a comprehensive agreement that eases sanctions to the continuation of economic restrictions. Each scenario, they argued, would produce very different outcomes for inflation, the foreign exchange market, stocks and other assets.
Hamid Zamanzadeh, acting head of the Macroeconomic Affairs Office at the Plan and Budget Organization, said Iran's macroeconomic conditions deteriorated sharply following renewed external pressures, including the activation of the UN snapback mechanism, tighter sanctions and the economic consequences of last year's conflict.
According to Zamanzadeh, Iran's economy contracted by 2.2% year-on-year in the winter of 1404 (December 2025–March 2026), compared with 2.7% growth in the autumn of 1404 (September–December 2025) before the conflict. Current evidence suggests the downturn likely continued through the spring of 1405 (March–June 2026).
All major sectors of the economy, including industry, services, agriculture and oil, recorded negative growth during the winter quarter. The services sector swung from 2.6% growth in autumn to a 2.6% contraction just one season later, while oil sector growth dropped from 6.1% to negative 2.3% as export restrictions and declining oil revenues weighed on activity.
Private demand also weakened significantly. Household consumption fell 4.8% while investment declined, leaving government spending as the only major component of GDP to post positive growth. Zamanzadeh said this partly reflected a crowding-out effect, with the government absorbing a larger share of available financial resources and leaving fewer opportunities for private-sector financing.
Broad Slowdown
Industrial data from large listed companies also pointed to a broad slowdown. Compared with Esfand 1403 (February–March 2025), output in Esfand 1404 (February–March 2026) fell sharply across key industries. Production in basic metals declined 11.7%, while chemical output dropped 20.2%. Vehicle manufacturing fell 32.6% and rubber and plastic production contracted 26.9%, indicating that weakness had spread across much of the industrial sector. With economic pressure continuing after the conflict, the contraction is expected to have extended into the first quarter of 1405 (March–June 2026).
Inflation has become another major challenge. Zamanzadeh said consumer prices have accelerated steadily since late 1403 (late 2024–early 2025), pushing inflation to an unprecedented 88.6%. He argued that sanctions, war and economic isolation were the main drivers, reducing government revenues while increasing public spending, money supply growth and exchange-rate pressures.
Although the removal of subsidized foreign exchange and the 40-day war intensified inflation, he noted that relatively moderate rent inflation prevented headline inflation from exceeding 100%. Housing rents account for more than 30% of household spending, and rental inflation has remained around 31%, well below price increases recorded for many other consumer goods.
Labor market conditions have also weakened. Zamanzadeh said nearly 800,000 working-age people without jobs were added during 1404 (March 2025–March 2026). As a result, lower unemployment should not automatically be viewed as an improvement because many discouraged workers have stopped searching for jobs and left the labor force.
The government's fiscal position has also come under growing strain. The proposed 1405 budget projects total resources of roughly 7 quadrillion tomans, while the combined operational and capital deficits reach about 1.4 quadrillion tomans. The government plans to finance much of the gap through withdrawals from the National Development Fund, financial asset sales and bond issuance.
However, Zamanzadeh warned that the official figures may underestimate the real deficit because lower oil income, weaker tax revenues and additional war-related expenditures could widen the funding gap. The budget deficit now equals roughly 27% of total government spending, increasing borrowing needs and putting additional pressure on interest rates and financial markets.
Debt market yields have climbed to around 40%, although real interest rates remain negative because of exceptionally high inflation. Such financing costs, Zamanzadeh said, are unsustainable for manufacturers and ultimately feed higher production costs and inflation.
Diplomacy Matters
He added that the foreign exchange market remains the country's most politically sensitive asset market. Since 1404 (March 2025–March 2026), renewed sanctions, regional conflict and tighter economic restrictions have reduced foreign currency earnings while boosting precautionary demand, capital outflows and speculative buying. As a result, he said, the future direction of the rial will depend more on foreign policy developments than on domestic economic measures.
Looking ahead, Zamanzadeh outlined three possible paths for the economy. A final agreement and sanctions relief would likely improve the outlook for domestic assets such as equities, housing and bonds. A temporary understanding could gradually ease inflation and stabilize the currency after an adjustment period, though foreign assets may still outperform. Failure to reach any agreement, however, would likely keep inflation elevated, weaken the rial and strengthen demand for foreign currencies and gold.
