China’s growth beats war-driven headwinds

China’s economy expanded faster than expected in the first quarter, giving Beijing a firmer platform as it confronts the fallout from the war involving Iran, but the details beneath the headline number pointed to a recovery still leaning heavily on industry and exports while households remain cautious. Official data released on Thursday showed gross domestic product grew 5.0% from a year earlier in January to March, above the 4.8% forecast in a Reuters poll and up from 4.5% in the final quarter of 2025. Quarterly growth came in at 1.3%, slightly ahead of the previous quarter.

The stronger reading suggested that the first shockwaves from the conflict in the Middle East have not yet knocked China off course. Markets took the figures as a sign of resilience. Mainland share indices rose after the release and the yuan held near its strongest levels in three years, reflecting confidence that the world’s second-largest economy has, for now, absorbed higher energy risks better than some had feared.

Yet the composition of growth was less reassuring. March industrial output rose 5.7% from a year earlier, beating expectations, but retail sales slowed to 1.7%, well below forecasts and down from 2.8% in the first two months of the year. Fixed-asset investment in the first quarter rose 1.7%, also missing expectations, while property investment fell 11.2%. Those figures reinforced a pattern that has defined China’s economy for months: factories, infrastructure and technology manufacturing are carrying more of the load than domestic consumption or housing.

That imbalance matters because Beijing has repeatedly signalled that stronger household demand is essential to putting growth on a steadier footing. Economists cited in the reporting on Thursday said the first-quarter strength was driven largely by momentum built in January and February, especially through exports and industrial activity, while March showed signs of softer conditions. The slowdown in shop spending is particularly sensitive because consumer confidence has remained fragile even as policymakers talk up support for incomes, jobs and services-led demand.

The war has complicated that task without yet derailing it. Since hostilities erupted on 28 February, China has faced a familiar vulnerability: it is the world’s largest energy importer and still relies on stable global shipping and manageable oil prices to protect factory margins and household purchasing power. Reuters reported that economists believe China has so far weathered the shock because of large oil reserves, a diversified energy mix and price controls, but they also warned that persistently higher oil costs are beginning to filter through supply chains and squeeze profits.

Evidence of that pressure is already visible. Reuters noted this week that factory-gate prices in March rose for the first time in more than three years, a signal that energy-driven cost increases are feeding into production. Export growth, which had been one of the brighter spots, also lost momentum in March after a very strong start to the year, raising the possibility that manufacturers will find it harder to sustain their pace if shipping costs stay elevated and overseas demand weakens.

Beijing’s response is likely to stay measured unless the conflict worsens. Policymakers have already set a budget deficit of about 4% of GDP for 2026 and planned heavy bond issuance to support activity. Analysts polled by Reuters expect the central bank to keep the one-year loan prime rate steady through the year, with only a modest cut to reserve requirements anticipated later on. A stronger first quarter gives officials more room to avoid large-scale stimulus at this month’s Politburo meeting, though that calculus could change if oil prices climb further or exports weaken more sharply.

The broader international backdrop is not especially forgiving. The IMF said in its April World Economic Outlook material that the Middle East conflict is lowering growth expectations for advanced economies in 2026, even if the aggregate effect is described as modest. For China, that matters less through direct battlefield exposure than through energy costs, shipping uncertainty and the health of major overseas markets. A prolonged conflict would test the durability of China’s export-led strength at the same time as its consumer recovery remains incomplete.