The Impact of Iran's Geographical Landscape on Its Economy and Politics

Economic

Political

Summary:

This strategic location places Iran at the crossroads of major trade routes between Asia and Europe, making it a critical player in regional geopolitics.

Iran, a nation steeped in history and rich in cultural heritage, occupies a unique geographical position in the Middle East. Its diverse landscape, which includes mountain ranges, deserts, and access to vital waterways, has played a crucial role in shaping its economic and political landscape. From the rugged terrain of the Zagros and Alborz mountains to the expansive deserts of Dasht-e Kavir and Dasht-e Lut, Iran's physical geography has significantly influenced its resource distribution, trade routes, and geopolitical strategies. This article explores how the geographical features of Iran have impacted its economy and politics, highlighting the complexities and challenges that arise from its location and topography.

Geographical Overview of Iran

Strategic Location

Iran is strategically located in Western Asia, bordering seven countries: Iraq, Türkiye, Armenia, Azerbaijan, Turkmenistan, Afghanistan, and Pakistan. It also has coastlines along the Caspian Sea to the north and the Persian Gulf and Gulf of Oman to the south. This strategic location places Iran at the crossroads of major trade routes between Asia and Europe, making it a critical player in regional geopolitics.

The Persian Gulf in particular, is of immense importance to Iran and the global economy. It is one of the most significant regions for oil production and export, with Iran controlling some of the vital shipping lanes through the Strait of Hormuz, a narrow passage that sees about 20% of the world's petroleum traded by sea. The control of this strait gives Iran considerable geopolitical leverage, especially in its interactions with global powers and neighboring countries.

Mountainous Terrain

Iran's topography is dominated by two major mountain ranges: the Zagros Mountains in the west and the Alborz Mountains in the north. The Zagros Mountains stretch over 1,500 kilometers from the northwest to the southeast of the country, forming a natural barrier that has historically protected Iran from invasions. The Alborz Mountains, which run parallel to the southern coast of the Caspian Sea, contain Iran's highest peak, Mount Damavand, standing at 5,610 meters.

These mountain ranges have had a profound impact on Iran's internal cohesion and defense strategy. The rugged terrain has made transportation and communication difficult, contributing to the relative isolation of various regions within the country. This isolation has fostered a degree of regionalism, with distinct cultural and linguistic groups developing in different parts of the country.

Deserts and Arid Climate

Approximately one-third of Iran's land area is covered by deserts, with the Dasht-e Kavir and Dasht-e Lut being the most prominent. These deserts are among the hottest and driest places on Earth, making them largely uninhabitable and unsuitable for agriculture. The arid climate of these regions has limited Iran's agricultural output, forcing the country to rely heavily on irrigation and making water resources a critical concern for the government.

The scarcity of arable land and water has also influenced population distribution, with the majority of Iran's population concentrated in the more fertile regions to the north and west of the country, particularly along the Caspian Sea and in the foothills of the Zagros and Alborz mountains. This uneven population distribution has implications for economic development and political stability, as the government must manage the needs of densely populated urban areas alongside the more sparsely populated and underdeveloped rural regions.

The Impact of Geography on Iran's Economy

Natural Resources and the Economy

Iran is endowed with significant natural resources, particularly oil and natural gas. According to British Petroleum, the country possesses the fourth-largest proven crude oil reserves and the second-largest natural gas reserves in the world. These resources are primarily located in the southwestern region of Iran, particularly in the Khuzestan province, which lies at the foothills of the Zagros Mountains.

The concentration of oil and gas resources in this region has shaped Iran's economy, making it heavily reliant on the energy sector. Oil exports account for a significant portion of government revenues and foreign exchange earnings. However, this dependency on oil has also made the Iranian economy vulnerable to fluctuations in global oil prices and international sanctions.

The geopolitical importance of Iran's oil and gas resources has also influenced its foreign policy. Iran has used its energy resources as a tool of economic diplomacy, forming alliances with countries that are dependent on its energy exports, while also facing economic pressure from those seeking to curtail its influence in the global energy market.

Agriculture and Water Resources

As stated by World Bank, despite its vast land area, only about 10% of Iran's land is arable, and agriculture contributes to less than 10% of the country's GDP. The arid climate and lack of sufficient rainfall have made agriculture challenging, forcing the country to rely heavily on irrigation from rivers, underground aquifers, and dams. The main agricultural regions are located in the north and west, where the climate is more temperate and the soil more fertile.

Water scarcity is one of the most pressing challenges facing Iran's economy. The country's rivers, including the Karun, Karkheh, and Zayandeh Roud, are crucial for both agriculture and human consumption, but they are under severe stress due to overuse, pollution, and climate change. The depletion of water resources has led to the drying up of lakes and rivers, reduced agricultural output, and the displacement of rural communities, contributing to urban migration and social unrest.

The Iranian government has invested in large-scale infrastructure projects, such as dams and irrigation systems, to manage its water resources. However, these projects have often been criticized for their environmental impact and inefficiency. The construction of dams has led to the displacement of communities, destruction of ecosystems, and further exacerbation of water scarcity in downstream areas.

Trade and Transportation

Iran's geographical location as a land bridge between East and West has historically made it an important hub for trade and commerce. The ancient Silk Road, which connected China to Europe, passed through Iran, facilitating the exchange of goods, culture, and ideas. Today, Iran continues to be a critical transit country for trade routes connecting Central Asia, the Middle East, and Europe.

The country's mountainous terrain, however, poses significant challenges to transportation and infrastructure development. The rugged landscape makes the construction and maintenance of roads, railways, and pipelines difficult and costly. Despite these challenges, Iran has invested in expanding its transportation network, including the construction of highways, railways, and ports, to enhance its connectivity and boost trade.

The development of the Chabahar port in southeastern Iran, for example, is part of the government's strategy to increase its access to international markets and reduce its dependence on the Strait of Hormuz. The port is intended to serve as a major transit hub for goods from India, Afghanistan, and Central Asia, providing an alternative trade route that bypasses Pakistan and the Persian Gulf.

The Impact of Geography on Iran's Politics

Internal Political Dynamics

Iran's diverse geography has contributed to the development of distinct regional identities and has influenced the country's internal political dynamics. The mountainous terrain and the isolation of certain regions have fostered a sense of autonomy among various ethnic and cultural groups, such as the Kurds in the west, the Baluchis in the southeast, and the Azeris in the northwest.

These regional identities have occasionally clashed with the central government's efforts to impose a unified national identity and exert control over the entire country. Ethnic and regional tensions have sometimes erupted into violence, particularly in border regions where separatist movements have sought greater autonomy or independence. The government's response to these movements has often been harsh, with security forces deployed to suppress dissent and maintain control over restive regions.

The geographical isolation of certain regions has also contributed to uneven economic development across the country. While urban centers such as Tehran, Isfahan, and Shiraz have seen significant investment and growth, rural and border regions have often been neglected, leading to disparities in income, infrastructure, and access to services. This economic inequality has fueled discontent and resentment among marginalized communities, further complicating the country's internal political landscape.

Geopolitics and Foreign Relations

Iran's strategic location and its control over the Strait of Hormuz have made it a key player in regional and global geopolitics. The Strait of Hormuz is one of the most important chokepoints for global oil transportation, with about 20% of the world's oil passing through it. Iran's ability to threaten or block this vital shipping lane gives it significant leverage in its dealings with both regional rivals and global powers.

This geographical advantage has influenced Iran's foreign policy, particularly its approach to relations with the United States and its neighbors in the Gulf Cooperation Council (GCC). Iran's geopolitical strategy has often involved leveraging its control over the Strait of Hormuz to counterbalance the influence of the United States and its allies in the region.

Iran's mountainous borders with Iraq, Türkiye, and Afghanistan have also played a role in shaping its foreign relations. The Zagros Mountains, for example, have historically served as a natural barrier between Iran and Iraq, influencing the dynamics of conflict and cooperation between the two countries. During the Iran-Iraq War (1980-1988), the mountainous terrain made conventional warfare difficult and contributed to the protracted nature of the conflict.

In recent years, Iran has sought to expand its influence in the region through a combination of military, economic, and cultural initiatives. This has included supporting proxy groups in Iraq, Syria, Lebanon, and Yemen, as well as investing in infrastructure projects and trade agreements with neighboring countries. Iran's geographic position at the crossroads of the Middle East has made it a central player in the region's complex web of alliances and rivalries.

Environmental Challenges and Political Stability

Iran's geographical and environmental challenges, particularly water scarcity and desertification, have also had political implications. The depletion of water resources and the effects of climate change have worsened existing social and economic tensions, particularly in rural and agricultural communities that depend on water for their livelihoods.

The government's inability to adequately address these environmental challenges has led to widespread protests and unrest in recent years. For example, the drying up of Lake Urmia, once one of the largest saltwater lakes in the world, has had devastating effects on the local environment and economy, leading to protests by farmers and residents affected by the crisis.

These environmental challenges have also forced the government to prioritize certain regions and sectors over others, leading to perceptions of neglect and discrimination among marginalized communities. The resulting social unrest has posed a significant challenge to the government's authority and stability, particularly in regions with a history of separatism or opposition to the central government.

Conclusion

Iran's geographical landscape has played a pivotal role in shaping its economy and politics. The country's strategic location, mountainous terrain, arid climate, and natural resources have influenced everything from its internal cohesion and economic development to its foreign policy and geopolitical strategy. While Iran has benefited from its control over key trade routes and energy resources, it has also faced significant challenges, including regional disparities, environmental degradation, and social unrest.

As Iran continues to navigate the complexities of its geography, the government will need to address the environmental and economic challenges that threaten its stability and development. This will require a combination of investment in infrastructure, sustainable resource management, and efforts to reduce regional inequalities. The interplay between Iran's geography and its political and economic landscape will continue to shape the country's future, influencing its role in both regional and global affairs.

Source: Modern Diplomacy

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Owen Li

‘Median expectations for inflation over the next 12 months remained unchanged at 2.8% for the third consecutive month, having fallen in May to their lowest level since September 2021. Median expectations for inflation three years ahead edged up by 0.1 percentage points in July to 2.4%’, the ECB reported.

The uncertainty about inflation expectations one year ahead remained unchanged once again at the lowest level since February 2022, the survey showed.

Perceived inflation over the past 12 months declined further, from 4.5% in June to 4.1% in July, according to the survey.

Nominal income growth expectations decreased from 1.4% in June to 1.1% in July, and the expectations for nominal spending growth fell slightly from 3.3% in June to 3.2% in July, the survey found.

According to the survey, over the past 12 months, perceptions of nominal spending growth decreased from 5.8% in June to 5.4% in July.

Expectations for the unemployment rate one year ahead remained stable at 10.6% in July, the survey showed.

‘Consumers continued to expect the future unemployment rate to be only slightly higher than the perceived current unemployment rate (10.1%), implying a broadly stable labour market’, the ECB said.

Expectations for economic growth over the next 12 months became more negative, standing now at -1%, versus -0.9% in June and -0.8% in May, the survey showed.

The survey reported that consumer expectations of home price increases one year ahead fell back in July to 2.6% – the same level registered in May after a slight pickup to 2.7% in June –, and that expectations for mortgage interest rates 12 months ahead remained unchanged at 4.8%.

‘The net percentage of households reporting a tightening (relative to those reporting an easing) in access to credit over the previous 12 months declined further, as did the net percentage of those expecting a tightening over the next 12 months’, the ECB said. ‘Both indicators remained close to levels last seen in the second quarter of 2022.’

Measured quarterly, the share of consumers who reported having applied for credit during the past three months increased from 16.8% in April to 17.2% in July, according to the survey.

Source：Econostream Media

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Westpac

Economic

In Australia, the RBA's August meeting minutes again reinforced the Board's well telegraphed views on the economy. In short, there is "less spare capacity than previously assumed" given stronger momentum in demand and a weaker assessment of potential supply. The Board also noted that financial conditions appeared to have "eased modestly" over recent months, as house prices and credit growth had picked up. Alongside the uncertainty over the timing of inflation's sustainable return to target, these judgements were central to the debate over whether to raise or maintain the cash rate at the July meeting.

While the case to leave the cash rate unchanged was deemed stronger, the decision was paired with a need to remain vigilant of inflation risks and guidance that "it was unlikely that the cash rate target would be reduced in the short term", with the Board of the view that "holding the cash rate target steady at its current level for a longer period than currently implied by market pricing may be sufficient to return inflation to target in a reasonable timeframe".

Chief Economist Luci Ellis' essay this week assesses the judgements and points of uncertainty underlying the RBA's decision making. To us it is evident that, while a "greater-than-usual weight" might be being placed "on the flow of data, relative to the forecasts", it is only after the RBA judge labour market slack to have emerged that they will shift their stance on policy. We continue to expect 100bps of easing through 2025, beginning at the February meeting.

Offshore, it was also a quiet week, markets largely marking time ahead of tonight's address to the Jackson Hole Symposium by FOMC Chair Powell.

Ahead of Chair Powell's address, the minutes of the July FOMC meeting made clear that the Committee is very close to deciding the stance of policy is now unnecessarily tight and should be eased. In their discussions, members expressed growing comfort with the trajectory of inflation, with "some further progress… broad based across the major subcomponents of core inflation". Supply and demand in the labour market was also regarded as coming into better balance.

Not known at the time of the meeting is that nonfarm payrolls over the year to March 2024 was 818k lower than initially estimated. While we won't know the month-by-month profile until early next year, when this week's initial revision is finalised, it is equivalent to the average monthly gain over the year to March 2024 being revised from 242k to 174k. Considering payrolls captures the number of jobs, which some people may have two or more of, and as population growth averaged 133k over the year to March 2024, it now looks as though the US labour market has been in balance for more than a year. This fits with CPI ex-shelter inflation holding at or below the 2.0% target since mid-2023.

Note though, activity growth is still characterised by the Committee as robust, so there is no cause for alarm. Instead, the tone of commentary from FOMC officials this week has remained measured, consistent with the "majority" view in the minutes that "if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting".

Of the other data released this week, the inflation readings from the Euro Area and Canada were most significant. Euro Area inflation outcomes for July were unchanged in the final release, prices unchanged in the month and up 2.6%yr. Constructive for the inflation outlook, the ECB's wage measure also moderated to 3.6%yr from 4.7%yr three months earlier. Canadian annual headline inflation meanwhile edged lower in July from 2.7%yr to 2.5%yr as expected.

The data flow and commentary from officials therefore continues to point to rate cuts in coming months not only in the US but across most of the developed world, including the Euro Area, Canada and the UK.

To stay updated on all economic events of today, please check out our Economic calendar

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Kevin Du

Cryptocurrency

As centralized domain incidents highlight security flaws, an executive argued that decentralized naming on the Bitcoin network would be a better alternative for domain names.

Mike Carson, the founder of the Bitcoin-based naming project Spaces Protocol, said everyone currently relies on trusted third parties for their usernames and domain names. However, an incident involving decentralized finance (DeFi) protocols relying on Squarespace’s registry system highlighted problems in the current setup.

On July 11, an attack on the Squarespace DNS registry affected over 100 crypto projects. The vulnerability threatened the DeFi space with phishing attacks, which resulted in funds being lost.

Carson believes that this highlights a need for decentralized domains and argues that it should be on Bitcoin, the most secure and decentralized blockchain.

Domains are digital assets that should be on a blockchain

Carson, who founded the domain name back-ordering service Park.io and co-founded software firm Wizehive, told Cointelegraph that domains should be on a blockchain. After years of working with domain registrars, the executive realized that domains should be decentralized. He explained:

“When I owned and managed three ICANN-accredited registrars and worked with various registries and registry operators, I realized that domain names are digital assets and should be managed on a blockchain and not by centralized trusted third parties.”

The executive also compared domain name registrars to banks and Bitcoin (BTC). Carson argued that people should not be forced to rely on a third party to secure their domains. “Why should we have to ask permission to use our money or our names,” he asked.

Furthermore, Carson also highlighted other incidents of government censorship that highlighted the importance of having decentralized domains. In 2017, the Spanish government raided the offices of DotCat (.cat) domains that promoted Catalan independence.

The executive also pointed toward the blocking of high-profile social media accounts and said that this also highlights the importance of decentralized usernames and domain names.

Related: Crypto execs on DeFi domain hacks: Don’t interact with crypto for now

Domain names should be anchored on Bitcoin

Carson, who also previously contributed core code to the Ethereum Name Service (ENS) and Handshake (HNS), argued that the best solution for domains is Bitcoin. He said that this is very important that they feel like it’s inevitable. Carson explained:

“Bitcoin is the most secure and decentralized proof-of-work blockchain, by far. It makes sense that decentralized naming should be anchored in the Bitcoin block space.”

The executive said they built the Spaces Protocol on Bitcoin with these in mind. Carson also added that they built the protocol with “cypherpunk” ideals. “There is no separate token, no premine and no foundation. No changes to the Bitcoin protocol are necessary,” he added.

Carson added that they built Spaces to scale to billions of names while only leaving a small footprint on the Bitcoin block space. He added:

“I think decentralized naming can bring the next billion users to Bitcoin. There are hundreds of millions of domain names and social media companies have billions of users.”

The domain professional also argued that if anything is as important as money for society, it is naming. “Blockspace on the Bitcoin blockchain is valuable because it is the most secure and decentralized ledger in existence. The first killer app built to utilize this was Bitcoin as money. The next will be naming.”

Source: COINTELEGRAPH

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Alex

Economic

Central Bank

Consider the tale of two central banks early this month. Each is long-established, with influence that extends well beyond its country's borders, and both are pressed to make delicate judgment calls aimed at continuing to reduce inflation while avoiding undue damage to growth and jobs. In the event, they end up taking very different approaches within 24 hours of each other.

The first protagonist is the Bank of England (BoE), which cuts its policy rate by 25 basis points (bps) following a 5-4 vote that reflects the complexity of the underlying economic issues. The other is the US Federal Reserve (Fed), which takes pride in forging a consensus and delivering a unanimous vote, only to get battered by analysts and the media in the days following its decision. Which central bank do you trust more with your economic well-being and that of your family and friends?

This is an important question because trust underpins a central bank's ability to fulfil its mandate. Much of today's financial architecture rests on the assumption that central banks are committed to maintaining public confidence in their policymaking. After all, an inflation target must be credible to anchor inflation expectations; and the same goes for forward guidance that is meant to smooth out the bumpiness of policy adjustments over time.

Trust and credibility are supported by offering greater transparency, a process that has evolved over the years into holding regular press conferences and publishing meeting minutes and transcripts. In some cases, the central bank makes quarterly quantitative projections for major policies and economic metrics.

The credibility of both the BoE and the Fed has been bolstered by good outcomes. But they differ on an important input metric: how to communicate their policy decision-making. The situation reminds me of an old quip about lawyers and economists: Unlike lawyers, who can argue with 100% conviction even when the foundation of their case is very weak, economists need a very strong foundation to argue with any conviction at all.

Having incorporated independent, external members into its Monetary Policy Committee (MPC), the BoE does not hesitate to signal divisions among its top decision-makers. The recent 5-4 vote in favour of a cut followed a June vote of 7-2 in favour of keeping rates unchanged. And in February, the MPC voted 2-6-1, with two members calling for a hike, six favouring no change, and one supporting a cut. In each case, all the arguments behind these votes were explained in the days and weeks following the MPC's meeting.

Revealing such a range of individual positions is essentially unheard of at the Fed. While the US central bank prides itself on welcoming a diversity of views during its deliberations behind closed doors, it is also steeped in the tradition of consensus decision-making. Thus, in practice, it maintains very high barriers to publicising dissenting views. Even the Fed Board minutes that are released three weeks after each meeting tend to gloss over the full array of views that were aired. To find out what was really said, one must wait for the full transcripts, which are typically released five years later.

Don't get me wrong. There is value in a consensus-based approach that helps reconcile different opinions and analyses. But a fabricated consensus — often pursued for political reasons or to save face (supposedly) — tends to obfuscate and marginalise views that deserve broader consideration. Coupled with a structural lack of cognitive diversity and a high probability of falling into groupthink, the consensus obsession ultimately undermines the very credibility that the Fed has been trying to restore since its big policy error in 2021.

By refusing to offer the type of decision-making transparency adopted by the BoE, the Fed inadvertently mirrored the complacency of a market that had failed to consider the possibility of a faster and broader than anticipated economic slowdown. As a result, the market reacted violently when a slowdown became apparent, following the release of weaker-than-expected Purchasing Managers' Index data and the latest monthly employment report, which came in the immediate aftermath of the Fed's policy meeting.

The market had absorbed chair Jerome Powell's repeated assurances (including at the European Central Bank conference in Sintra, Portugal, on July 2) that a "fundamentally healthy" economy and a solid labour market gave the Fed ample time to decide on rate cuts. When new data suggested otherwise, chaos ensued as markets scrambled to raise the probability of an unusually large 50bps cut in September from virtually zero to around 80%, as of Aug 2. (They have also priced in a faster and higher magnitude overall rate-cutting cycle.)

This violent reaction brought a dramatic collapse in yields on government bonds and large stock-market losses that, having started in the US, spread globally and exposed vulnerabilities elsewhere, most notably in Japan. Worries about the heightened risk of financial and economic breakage even led some (though not me) to call for an emergency inter-meeting rate cut.

No, I am not advocating that the Fed adopt the type of radical transparency for which the hedge fund Bridgewater is famous. There are certain areas, such as the quarterly "dot plot" of forecasts, in which the Fed has arguably already gone too far. Still, the Fed could — and should — be more open about the policy decisions that affect us all.

Source: The Edge Malaysia

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S&P Global Inc.

Data Interpretation

The provisional estimate of the August PMI is one of improved growth, suggesting a downturn has been avoided.However, the improvement was largely driven by an upturn in the French service sector, which coincided with a temporary boost from the Paris Olympics, hinting that growth could subside again in September. This downbeat prognosis is supported by a renewed fall in employment amid deteriorating business confidence and a third month of worsening new order inflows, the latter especially severe in the manufacturing economy, which remained deep in contraction.

The flash PMI data do, however, signal a further cooling of input cost pressures in the service sector, which has been a key area of concern for the ECB's hawkish policymakers.

Here are our top-five takeaways from the August flash PMI data:

1. Economic downturn avoided

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, rose to 51.2 in August from 50.2 in July. The latest reading signals a faster pace of output growth following two successive months in which the pace of expansion had slowed to near-stagnation.

The uplift in the PMI is therefore welcome news in indicating that a renewed downturn in activity has been avoided in August. A simple model using OLS regression indicates that the August PMI is consistent with GDP rising at a quarterly run-rate of 0.15% after a flat July. This nevertheless hints at the economy losing momentum in the third quarter from the 0.3% increase registered by official data for the second quarter.

2. Olympian effort?

However, the upturn may prove to be short-lived. A key factor behind the stronger increase in eurozone business activity in August was a renewed expansion in France, where output rose to the largest extent in almost a year-and-a-half. More specifically, the French service sector reported the largest monthly rise in business activity for 27 months, coinciding with the Paris Olympics, suggesting that this burst of activity will prove temporary.

In contrast, the picture in French manufacturing remained one of accelerating decline. The flash PMI for Germany also remained subdued, with activity dropping for the second month running, and at the sharpest pace for five months, thanks to a steep manufacturing decline accompanied by only a modest expansion of activity in the service sector.

Although the rest of the euro area as a whole continued to see output increase at a slightly faster rate midway through the third quarter, the expansion was the second-weakest seen over the past seven months.

3. Manufacturing mired in downturn

June's interest rate cut by the ECB meanwhile appears to have had limited impact on demand for goods. Eurozone manufacturing output continued to fall sharply in August, signaling a sustained downturn that is being mirrored in official data. The latter, currently available up to June, showed factory output falling at an accelerated annual rate of 4.9%.

With new orders falling in eurozone manufacturing at the fastest rate for eight months in August, the near-term prognosis is one of the sector being mired in its recession in the near-term, with particular weakness evident in both France and Germany.

4. Job losses signalled as business optimism slides

The deteriorating underlying picture darkens further once employment data are considered. The flash PMI signaled a decline in employment for the first time in eight months. Although only marginal, the latest decline represents a continuation of a weakened job market trend that has been evident over the past three months.

Services employment showed the smallest - only modest - rise for seven months, accompanied by a further solid fall in manufacturing workforce numbers. The latter decline was at a rate not exceeded since the height of the pandemic and, prior to that, 2012.

Germany reported the largest fall in employment since August 2020. Outside of the pandemic, German employment has not fallen at this rate since January 2010. Jobs were also cut in France, but rose elsewhere.

The growing reluctance to hire reflected a further worsening of business expectations about output growth in the year ahead, which fell for a third straight month in August to an eight-month low, dropping further below the survey's long-run average.

5. Prices rise at increased, but still modest rate, as input cost growth moderates

Although average prices charged for goods and services across the eurozone increased at the fastest pace in four months, the rate remains low by standards seen over the pandemic and broadly consistent with the ECB's 2% target according to historical comparisons. This suggests that headline inflation will fall further in the coming months from the 2.6% rate seen in July.

Services charges rose at the sharpest pace in three months, while manufacturing output prices increased for the first time since April 2023.

Encouragingly, from an inflation-fighting perspective, input cost pressures abated to the lowest for eight months. Services input prices rose at the softest pace since April 2021, while manufacturing cost inflation was unchanged from the 18-month high seen in July.

The cooling of services input cost inflation is especially important, as this wage-oriented data series points to a cooling of core inflationary pressures in the eurozone economy.

Outlook

The August flash PMI corroborates S&P Global Market Intelligence's forecast for the eurozone to grow by a modest 0.8% in 2024, but this requires GDP to rise by almost 0.3% in the third and fourth quarters alike. This would clearly need the PMI to remain in growth territory and not fall back in September as some of the forward-looking data are hinting. September's PMI data will therefore prove important in confirming this outlook.

Our forecasters also expect the European Central Bank to cut interest rates twice more this year, by a cumulative 50 basis points, after having already cut by 25 basis points in June. The next cut is anticipated at September's meeting, in line with current market expectations. In this respect, the latest PMI data will likely not discourage any further loosening, though the August consumer price inflation numbers will be a major test of these monetary policy expectations.

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Devin

Energy

If Saudi Arabia's electricity sector were a country, it would match the entire oil consumption of Italy, Spain or Turkey. Despite also consuming prodigious quantities of natural gas, the kingdom uses nearly 1.4 million barrels per day in summer to generate power and water. But Riyadh may be about to turn the corner.

Like its GCC neighbours, Saudi Arabia needs large volumes of fuel for desalination and air-conditioning. It is on a bigger scale, though, and with the exception of Kuwait, its other Gulf colleagues use gas almost exclusively instead of oil. Fuel is supplied to the power sector at very low prices: until recently, less than $7 per barrel of crude oil.

After subsidy reductions in 2016 and 2018, electricity demand flattened out. But the attempts to diversify the economy, boost industry and tourism, and construct new cities, have seen power consumption resume its strong upward growth from 2021 onwards. An increasingly hot climate and new sectors such as data centres will push up future electricity needs: peak demand was up 9.5 per cent in the first half of this year.

This heavy use of oil is problematic in various ways. Not because Saudi Arabia cannot afford it – it can. Oil production costs are low, and reserves huge, probably more than will realistically be produced well into the second half of this century. This is not, as some naive analyses suggest, oil that would otherwise immediately be exported to the world market at $80 per barrel.

A recent Bloomberg opinion piece suggested that the future of Saudi Arabia's domestic oil consumption was crucial to the timing of a global peak oil demand. This is numerically true, but misleading. If Saudi Arabia does not devote the average 1.1 million bpd of its oil production to its power stations, but cuts back output by the same amount, there is no net effect on the world market.

The impacts are subtler. First, there is a huge swing between winter and summer demand, of nearly 1 million bpd. This complicates Saudi Arabia's task of market management as the leading country within Opec. The kingdom has turned to importing large amounts of Russian fuel oil during summer, probably significantly discounted. Eliminating crude burn would ease this seasonal shift, but it would leave Aramco with even more spare production capacity than it has today.

Second, burning oil is highly polluting, both to local air with sulphur dioxide, and with emissions of carbon dioxide. To make progress on its net-zero commitment by 2060, oil consumption in power plants has to drop sharply.

The country is well-aware of this issue. It has a programme to move to a mix of gas and renewables by 2030. New offshore gasfields and unconventional developments, including the giant Jafurah resource in the Eastern Province, are intended to boost sales gas output to at least 16 billion cubic feet per day by 2030, from 10.7 bcf last year. The increase is equivalent to about 900,000 bpd of oil, although a large part will be devoted to industrial use.

Saudi Aramco has begun work on new pipelines to supply the west coast, which has mostly lacked access to gas. A gas storage project that has just been commissioned will help balance consumption between summer and winter.

After some years of indecision and halting progress, the renewable programme, too, is accelerating. Nearly 13 gigawatts of renewables may be operational by the end of next year. The target is to have more than 100 gigawatts of renewables, mostly solar, by 2030, compared to national peak demand, which reached nearly 73 gigawatts this year. The Saudi Power Procurement Company aims to tender 20 gigawatts every year, which would be about on-track for the 2030 goal.

Allowing for reasonable electricity demand growth, if about half of the new gas output goes to power generation, then that plus the renewables would indeed eliminate oil use on a gross annual basis.

It is a very favourable time to build a large solar power sector. Consultancy Rystad thinks that there is enough global capacity to manufacture about 1,600 gigawatts of solar modules this year, but only about 500 gigawatts will be installed. The oversupply will be even more pronounced by 2026.

This glut means record-low costs, and should easily absorb another 20 gigawatts or more per year from Saudi orders. Even with the low oil and gas prices charged to the Saudi electricity sector, solar power will be cheaper.

The story is not quite so simple, of course. On a daily basis, demand peaks in the afternoon, then again in the early evening when people go home from work. Batteries can store a few hours of solar generation for the post-sunset period.

Renewable output also varies seasonally; solar output is greatest in the late spring when days are longer but temperatures still relatively cool. Electricity demand, meanwhile, is at its lowest in the cooler months of February and March, highest from June to September.

Two large projects on the west coast, at Magna and Wadi Baysh, are intended to pump water uphill with surplus electricity, and generate electricity by releasing it as required. This is the same concept as Dewa's Hatta dam. But, Saudi Arabia will need more long-term electricity storage options.

Although nuclear power isn't explicitly in the 2030 plan, unlike the UAE's successful programme, Saudi Arabia had after numerous delays asked to receive bids from four consortia last month. The Barakah plant took about nine years from the start of construction to begin generating, so a similar Saudi programme would only be active by the middle of next decade.

Tackling demand growth would make the combined task much easier. The country has had an active energy efficiency programme for several years, including methods such as district cooling. But electricity prices are still quite cheap, and tariffs do not vary by season or by time of day to encourage storage or optimal timing of consumption.

Still, even if the goals are not fully achieved, the Saudi power sector will look radically different by 2030. If the authorities can get all the moving parts of oil, gas, electricity, renewables, efficiency and perhaps nuclear working together, they will save money, cut emissions, and have a machine to drive towards net-zero.