New GDP data in Iran: is recovery underway?
In its recent quarterly Economic Trends, the Central Bank of Iran reported that the economy grew by 4.6% last spring (which corresponds to the first quarter of the Iranian year 1393 and the second quarter of 2014). What appears to be straightforward reporting of macroeconomic facts has caused much controversy in the Iranian media. Controversy is part and parcel of economic data in Iran, so nothing is new there, but in this case the facts themselves are not as straightforward as one might think. Mr. Rouhani and his economic team insist that the numbers are a firm sign that the recession has ended, while the opposition dismisses the news as bogus.
There is no doubt that CBI’s new GDP numbers for last spring are good news for the Rouhani government, as are the just-published labor force numbers by the Statistical Center for this summer, which show unemployment is down to 9.5% from 10.7% (more on this in another post). While I have no reason to disbelieve the numbers, I am not convinced that they tell us much if the two-year recession has ended.
There are two reasons for my pessimism. First, it is not easy to discern longer term cyclical trends from quarterly data because they are subject to seasonal variation. Second, and more importantly, we do not know why the economy has started to grow again. Has the economy hit the upside of a typical business cycle? Is it the changing of the guards, from Ahmadinejad to Rouhani? Or perhaps something less permanent, like the temporarily suspension of sanctions?
Many economists and commentators in Iran seem to believe in internal reasons for recovery. They point to the much improved government-business relations under Rouhani and the reversal of anti-business Ahmadinejad policies. Business confidence should be coming back on this count and output should continue to grow, but not if the main cause of the recession was the harsh international sanctions and not mostly internal? If what we are witnessing is the short-term effect of the Joint Plan of Action (JPA) signed last November with Western powers, all bets on an automatic recovery are off.
It would be helpful if the data spoke more clearly, but they don’t. There is seasonal variation to sort through, and furthermore the data are preliminary and subject to revision in the coming quarters. The complication introduced by seasonality becomes obvious when you consider that the CBI numbers actually show Iran’s economy to have contracted by 5.1% last spring. The positive 4.6% growth reported by the CBI (and drummed by the news media) is relative to the same quarter a year ago, which happens to have been one of the worst in recent memory. Does GDP always fall in the first quarter or is this decline means something?
Inspecting the Figure below shows that GDP declined in three out of the last five spring quarters, not exactly settling the seasonality issue. Agriculture always grows in the first quarter as winter gives way to spring, but other sectors are less predictable. Likewise, comparing output from spring to spring, we have three declines and two increases. So it is hard to be certain whether the 5.1% decline in output last spring is consistent with recovery. On the positive side, the decline last spring was only half as large as the one a year ago, so perhaps the smaller decline last spring means that things are looking up for the economy.
Figure. GDP by sector and Iranian quarters (1393_Q1=2014_Q2), in constant 1383 (2004) rials x 10^12
Source: CBI quarterly Economic Trends. (click here if the graph is not visible)
But what if those things are mostly related to the easing of sanctions? After all, the sector with the fastest growth last spring was industry (10.1%, quarter on same quarter) and we are told from other sources that the auto industry, which received special attention in the JPA, led the recovery in this sector (earlier I reported some preliminary data on this here). We also know that import of intermediate inputs picked up last spring, likely thanks for JPA, as did credit to industry, which could have followed rather than led the growth in industry.
The JPA-induced interpretation of recovery leads to a more pessimistic scenario than the internally, policy-induced interpretation. Since there is only six weeks left before JPA expires, and so far there is nothing to suggest that a deal is in the making, it is natural to wonder if the economy will stumble in the event of no agreement.
Iranian leaders do not seem terribly concerned with this possibility and appear unwilling to make concessions to reach a deal any time soon. Perhaps the new data has convinced them that the economic recovery can continue without a settlement of the nuclear issue, or, as Payam Mohseni has reported in Iran Matters, they believe that the geopolitics of the region has turned in their favor and it is the West that needs to find a way to prolong the negotiations — or both.