Iran War Slows Growth in Services, Manufacturing: S&P Global

Why It Matters

The slowdown in Iran’s service‑driven economy and rising inflation signal deeper structural strain, limiting growth prospects and heightening social risk. Manufacturing’s mixed signals underscore the need for policy focus on diversification and technology adoption to offset war‑induced volatility.

Key Takeaways

• Iran's war drags services PMI to weakest three‑month pace since early 2024
• Service‑sector price growth hits 45‑month high, outpacing manufacturing inflation
• Manufacturing output rises fastest in four years despite falling headcount
• AI spending lifts manufacturing production, ending 30‑month decline
• Higher Brent oil prices risk deeper inflation and unemployment in Iran

Pulse Analysis

The latest S&P Global PMI data paints a stark picture of Iran’s war‑driven economic malaise. Service‑sector activity, the traditional engine of growth, has stalled, with the PMI slipping to its lowest three‑month reading since early 2024. At the same time, price pressures have accelerated dramatically; service‑sector selling prices are climbing at a 45‑month high, while manufacturers face a 10‑month surge in input costs. The shock to Brent crude—rising from $73 to $105 per barrel—has amplified inflationary pressures, eroding household purchasing power and feeding concerns over higher borrowing costs.

Despite the gloom, Iran’s manufacturing base shows pockets of resilience. Output expanded at the fastest rate in four years, buoyed by a surge in new orders—the strongest since May 2022—and firms building inventory amid supply‑chain worries. Crucially, artificial‑intelligence investment has reignited production, ending a more than two‑year decline, while optimism around tariff‑driven re‑shoring and increased marketing spend lifted manufacturer sentiment to its highest level since February 2025. Yet, headcount fell for the first time in nine months, highlighting a disconnect between output gains and labor market health.

Looking ahead, policymakers face a delicate balancing act. Persistent war‑related inflation and a potential rise in unemployment could strain social stability, especially as service‑sector sentiment remains deeply negative. Diversifying away from oil‑linked revenue streams, accelerating AI and technology adoption, and stabilizing the fiscal environment will be essential to mitigate the war’s drag on growth. Continued monitoring of PMI trends and price dynamics will provide early warning signals for any further economic contraction.