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Published : 16 Apr 2026, 09:47 AM
China's economy picked up speed early in 2026 on strong exports and policy support, but cooling retail sales add urgency to Beijing's efforts to revive sluggish domestic consumption as the Iran war raises fresh risks to global demand and growth.
The conflict in the Middle East has exposed a key fault line: as the world's biggest energy importer and a heavily export-reliant economy, China is vulnerable to an oil shock already slowing trade, lifting factory costs and darkening the outlook for the year.
China's gross domestic product rose 5.0% over the first quarter from the year earlier, National Bureau of Statistics data showed on Thursday, beating analysts' expectations in a Reuters poll for growth of 4.8% and compared with a 3-year low of 4.5% in the fourth quarter.
Industrial output in the world's second-largest economy rose 5.7% in March from a year earlier, slowing from 6.3% growth in January-February, while retail sales, a gauge of consumption, grew 1.7% last month, down from the 2.8% gain in January-February. Analysts had forecast a 2.3% rise.
"The manufacturing side of the economy remains resilient and is still a key near-term growth anchor," said Zhou Hao, an analyst at Guotai Haitong Securities. "Looking ahead, China's macro agenda is likely to centre on two intertwined priorities: reflation and boosting domestic demand."
China's exports grew just 2.5% in March year-on-year, slowing sharply from 21.8% in January–February as the conflict drove up energy and transportation costs and weighed on global demand, though analysts cautioned the figure was also distorted by seasonal factors.
For the January-March period, exports still rose 14.7% from a year earlier, well above the full-year growth of 5.5% in 2025.
"On one hand you see resilience - the Iran war's impact on China is very limited. On the other hand you see imbalance - a strong export sector versus a modest domestic demand," said Xu Tianchen, senior economist at the Economist Intelligence Unit.
Early signs of strain are emerging, however. China's factory‑gate prices rose in March for the first time in more than three years, signalling that energy-driven cost pressures are seeping into the world's second-biggest economy and threatening already-thin corporate margins.
On a quarterly basis, the economy expanded 1.3% in January-March, in line with the poll, and compared with 1.2% growth in October-December.
Growth of fixed-asset investment eased to 1.7% in the first quarter from 1.8% in January-February - when infrastructure investment jumped 11.4% year-on-year.
POLICY SUPPORT
China has pledged to step up spending on major infrastructure and public services to help meet the 2026 growth target, the first year of the new five-year plan.
Fiscal expenditure rose 3.6% in January–February, picking up from a 1% increase in 2025 and adding to signs of stronger fiscal support.
Beijing has set a budget deficit of around 4% of GDP for 2026 and lined up heavy bond issuance to support growth, while the central bank has pledged to keep policy accommodative despite limited room to cut rates as inflation edges higher.
China's Politburo, a top decision-making body of the ruling Communist Party, is expected to meet later this month to assess the economic outlook.
Policymakers have acknowledged an "acute" imbalance between strong supply and weak demand, and have vowed to "significantly" lift household consumption's share of the economy over the next five years, though no specific target has been set.
Analysts polled by Reuters expect the central bank to keep the benchmark one-year loan prime rate unchanged through the end of 2026, while cutting banks’ weighted-average reserve requirement ratio by 20 basis points in the third quarter of the year.
