China’s economy expanded more than expected in the first quarter of 2026, with official data showing gross domestic product (GDP) growth of 5% year-on-year, marking the fastest pace in three quarters despite ongoing global uncertainty linked to the war in the Middle East. The stronger-than-forecast performance suggests that external shocks, including disruptions tied to the Iran conflict, have so far had limited impact on China’s overall economic momentum.

According to the National Bureau of Statistics, industrial output rose 5.7% in March compared to a year earlier, exceeding market expectations even though growth slowed compared to the earlier months of the year. However, retail sales, a key indicator of domestic demand, rose only 1.7%, falling short of forecasts and weakening from the 2.8% growth recorded in the January–February period, highlighting uneven recovery across sectors.

Officials noted that manufacturing remained a key driver of growth, helping offset weaker consumer activity. Analysts said industrial resilience, particularly in high-tech and export-oriented sectors, continues to anchor near-term expansion. However, economists also warned that domestic demand remains subdued, with consumption lagging behind production growth and creating structural imbalance in the recovery.

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China’s labour market showed signs of strain, with the surveyed urban unemployment rate rising unexpectedly to 5.4% in March, the highest level in a year. Fixed-asset investment increased by 1.7%, slightly slower than earlier months, while property investment dropped sharply by 11.2%, underscoring continued weakness in the real estate sector, which has been a long-standing drag on growth.

Despite external risks, including volatility from the Middle East conflict and global energy markets, China’s economy has remained relatively insulated due to earlier policy measures aimed at strengthening energy security and stabilising supply chains. Inflation pressures have also remained muted overall, with producer prices only recently turning positive after a prolonged period of deflation, while the broader GDP deflator continued to show weakness.

Economists say the mixed data may reduce urgency for immediate stimulus measures from Beijing, especially after the government set a growth target range of 4.5% to 5% for 2026, the lowest in decades. While policymakers maintain a cautiously optimistic outlook, analysts warn that weak consumption, labour softness, and external geopolitical risks could weigh on momentum in the coming quarters.

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