China economy beats expectations despite Iran war, Q1 growth 5%

China’s economy grew 5.0% year-on-year in the January–March quarter and 1.3% quarter-on-quarter, surprising markets that had anticipated a softer start to 2026. The official figures show the world’s second-largest economy opened the year stronger than many analysts expected despite the initial fallout from the Iran war.

The National Bureau of Statistics (NBS) reported that industrial production accelerated and remained a principal growth driver while retail sales lagged, signalling persistent weakness in domestic consumption. Industrial output rose 5.7% in March year-on-year, and retail sales increased 1.7%, underperforming estimates; exports slowed in March but still provided considerable support to quarterly GDP through strong early-year shipments.

Sectorally, technology and manufacturing exports—including semiconductors, electronics and machinery—helped underpin activity, while the long-running property downturn continued to weigh on household demand and investor sentiment. A large trade surplus and frontloaded shipments contributed to the headline surprise, yet the reliance on external demand leaves China exposed if global consumption weakens.

In the broader context, the International Monetary Fund (IMF) has trimmed China’s 2026 growth forecast to 4.4%, citing the economic shocks from the Iran conflict that are elevating energy costs and disrupting trade. Beijing’s official growth target range of 4.5%–5% for 2026 remains the policy reference point, and authorities are expected to deploy fiscal support and targeted measures should downside risks materialize. Energy price dynamics and prolonged geopolitical uncertainty are the principal channels through which the conflict could slow China’s momentum.

Market commentators say the Q1 surprise reduces immediate pressure on policymakers to act aggressively, but caution that the outlook is heavily conditional. Economists expect the authorities to prioritise measures that boost domestic demand and stabilise employment while preserving room for monetary flexibility. For investors and regional markets, the key near-term watch items are energy price movements, export orders and any signs of durable improvement in consumer spending.