Nearly six months after the U.S. and Israel launched an operation to overthrow the Iranian government, it’s fair to say their assault hasn’t exactly gone according to plan. Still, the ensuing war has followed a clear, predictable logic.
After decades of sanctions failed to persuade Iranians to overthrow the regime, Israel and the U.S. resorted to war; after that failed too, they turned to a naval blockade. Each escalation has had an impact, adding to the misery of life in Iran, but so far each has missed its ultimate target: forcing a surrender.
The military stalemate has once again turned attention to the economy and to the question that has always hovered over this strategy: just how much economic punishment can Iranian society absorb?
We can document how far living standards have fallen. Iran produces mountains of economic and social data, and, despite its isolation, millions of people travel to and from the country. But no one knows how much additional punishment would produce the political outcome the strategy anticipates.
No one should doubt that Iran's economy is in its worst shape in decades. Years of strict sanctions erased two decades of economic growth, and months of war caused hundreds of billions of dollars in damage to infrastructure and productive capacity and added millions to the ranks of the unemployed.
The U.S. and Israel appear to have initiated this war believing that Iran was on the brink of economic ruin. Much as an Iranian nuclear bomb was repeatedly said to be only weeks or months away, economic collapse was expected to arrive with the next ratchet of pressure.
But it has now become apparent that both the picture of extreme economic fragility and the expectation of regime change were highly exaggerated.
Iran's economy has performed poorly since President Donald Trump imposed his maximum-pressure campaign in 2018, but slow growth and stagnation are better descriptions than collapse. Employment recovered after taking an initial hit, rising from about 23 million to 25 million before the June war. Employment growth actually outpaced the working age population, which grew by about 1.7 million over the same period.
The war changed that. Both GDP and employment fell in spring 2026. By June, nearly half a million jobs had disappeared, largely as a result of the bombing campaign that began on February 28. The unemployment rate, which had remained below 8% for the previous two years, jumped to 9.1% this spring and is probably climbing as more businesses close for lack of imported inputs.
Establishing what has happened to GDP — and particularly GDP per capita, a good measure of average living standards — is more complicated. It is easy to make serious mistakes when comparing Iran's GDP over time, especially when converting output from rials into dollars. Depending on the exchange rate used, the resulting estimates can diverge enormously.
For example, valuing Iranian output at the free-market exchange rate, which fluctuates, produces a much smaller and more variable dollar value for Iran's economy. Currency depreciation should not be confused with an equivalent collapse in the volume of goods and services Iranians actually produce and consume.
For comparisons of real output over time, purchasing-power-parity measures provide a more meaningful benchmark. PPP conversion avoids the distortions caused by fluctuations in the market exchange rate and allows output to be compared at constant prices. According to the World Bank's constant-price PPP measure, GDP per person, a popular measure of living standards, recovered after the imposition of harsher sanctions. In 2025 it was 9.6% higher than in 2018, when Trump launched his maximum pressure campaign, and 5.5% more than in 2011, when sanctions first tightened under President Barack Obama and increasingly restricted Iran's international trade.
These are hardly impressive growth rates. Had Iran’s economy continued to grow at 5% per year after 2011, its GDP per capita would have been more than twice what it was in 2011. Still, these numbers do not describe an economy on the verge of collapse. That distinction matters because the political strategy of maximum pressure has rested heavily on the assumption that one more tightening of the economic vise could push an already exhausted economy —and therefore the political system — over the edge.
How much did the war add to the grim picture? The latest GDP figures covering the period of the war are for spring 2026. They show a surprisingly small contraction: output was just 0.21% below its level in spring a year earlier. Part of the explanation for the limited decline was a 6.5% growth in utilities, a heavily subsidized and largely government-provided sector. Manufacturing grew by 1.46%, a distant second.
Both sectors, however, have become increasingly vulnerable as the war has continued. Manufacturing has suffered from disruptions in supplies from heavily bombed steel and petrochemical facilities, while utilities themselves have become targets of U.S. attacks. The spring figures therefore tell us more about the economy's initial resilience than about how it will fare under a prolonged war and blockade.
Turning to a more direct measure of household welfare, the income and expenditure survey collected annually provides a better gauge. Unfortunately, the results of the household survey covering the war have not yet been released; they are expected next month.
Earlier surveys, however, reveal something important that the narrative of looming economic collapse misses. During the three years before the June war, from 2021/22 through 2024/25, real average per capita expenditure increased, and poverty rates declined .
A major reason for this economic resilience was the revival and expansion of cash transfers under the Raisi and Pezeshkian administrations, which focused on redistribution of funds to the poor rather than the more market-and business-friendly policies of President Hassan Rouhani. The transfers did not fully compensate households for years of inflation and sanctions, but they helped cushion their impact and helped prevent hunger among the poor.
Cash transfers have their limits. As sanctions and the blockade choke off oil revenues and force the government to print money to pay for the transfers, the cost of war is increasingly felt in rising prices. In spring, as bombs were falling on Tehran and major cities, prices rose at triple-digit annual rates.
A brief pause came on June 17 with the signing of the Memorandum of Understanding between Iran and the US, which lowered the dollar by 15%. Taking advantage of the lull in fighting to visit Tehran, I passed by many upscale stores in northern Tehran that had (optimistically) put their luxury imports on summer sale. The brief respite was enough to bring overall inflation last month to half the 99% annual rate it reached the month before.
The government's policy of allowing prices — including the exchange rate — to rise, rather than fixing prices and resorting to rationing, has contributed to the economy's resilience, and it helps explain why repeated predictions of imminent economic collapse have proved unreliable. It is difficult to predict how long the Pezeshkian government can continue this course and avoid rationing if food and fuel shortages emerge.
Iran has paid an enormous price in resisting sanctions and war to preserve its independence. Sanctions have reduced growth, hurt investment, and exacerbated inflation, while the war has destroyed productive assets and jobs. But an economy can perform badly for a very long time without collapsing, particularly when the state is able to redistribute income to the poor and when the people place a high value on national independence.
How Iran has staved off economic collapse despite the US-Israeli war
Aggregated summary from an independent source. Read the original at ResponsibleStatecraft.