China’s economy expanded faster than expected in the first quarter of 2026, demonstrating resilience in the face of global instability triggered by the U.S.-Iran conflict. Official data released Thursday showed gross domestic product growing 5% year on year, up from 4.5% in the previous quarter and surpassing analyst expectations of 4.7%. The stronger performance was largely driven by robust exports, which helped offset persistent weakness in domestic consumption.
The outbreak of conflict at the end of February disrupted global energy markets, pushing up prices for fuel, chemicals, and industrial metals such as aluminum. These price increases contributed to a rise in China’s nominal GDP growth, which climbed to 4.8% from 3.8% in the previous quarter. While this suggests a temporary easing of deflationary pressures, it has also introduced new challenges for businesses struggling to pass rising costs onto consumers.
Despite a slowdown in export growth during March due to the conflict, overall shipments rose 14.7% in dollar terms across the quarter. Strong demand for high-value goods such as semiconductors, automobiles, and ships played a key role, supported by government policies aimed at boosting advanced manufacturing sectors. Export momentum remains a critical pillar of China’s economic stability amid uncertain global conditions.
In contrast, domestic consumption showed signs of continued weakness. Retail sales rose just 2.4% year on year in the first quarter, with growth slowing to 1.7% in March. The sluggish performance reflects broader challenges facing Chinese households, including a prolonged downturn in the property market. New home sales fell sharply by 18.5% in value terms, further dampening consumer confidence and spending.
Investment growth also remained subdued, with fixed-asset investment increasing only 1.7% during the quarter. The modest pace highlights ongoing caution among businesses and local governments, particularly in the property sector, which continues to drag on overall economic activity.
Economists warn that underlying deflationary pressures have not disappeared. Structural factors such as declining birthrates, weak employment prospects, and the ongoing housing slump are expected to keep consumer price growth low. At the same time, companies are navigating rising input costs, though some have begun implementing modest price increases to maintain margins.
The stronger-than-expected GDP figures provide Beijing with some breathing room as it works toward its full-year growth target of 4.5% to 5%, one of the lowest in decades. However, uncertainty remains high, with analysts closely watching whether the government will introduce additional stimulus measures if global demand weakens further due to the ongoing conflict.
Recent policy steps, including extended consumer subsidies and capital injections into state-owned banks, signal a measured approach to economic support. Compared to previous years, the scale of stimulus remains relatively restrained, suggesting that policymakers are balancing the need for growth with concerns over financial stability.
