China's economy grew faster than expected in the first quarter of 2026, buoyed by strong exports and government spending, but cooling consumer demand and the ripple effects of the war in Iran are complicating Beijing's efforts to sustain momentum through the year.

Gross domestic product expanded 5.0 per cent in January–March compared with the same period a year earlier, according to data released on Thursday by the National Bureau of Statistics. The figure beat analysts' forecasts of 4.8 per cent and marked a significant recovery from the three-year low of 4.5 per cent recorded in the final quarter of 2025. On a quarter-on-quarter basis, the economy grew 1.3 per cent. Exports for the full first quarter surged 14.7 per cent year-on-year, well above the 5.5 per cent growth recorded for all of 2025. Industrial output rose 5.7 per cent in March, while fixed-asset investment edged up 1.7 per cent over the quarter, supported by an 11.4 per cent jump in infrastructure spending in January and February.

Yet the headline numbers mask underlying fragility. Retail sales — a key measure of domestic consumption — grew just 1.7 per cent in March, down from 2.8 per cent in the preceding two months and well below analysts' expectations of 2.3 per cent. Export growth also slowed sharply to 2.5 per cent in March alone, partly due to seasonal factors but also reflecting the disruption caused by the conflict in Iran. The closure of the Strait of Hormuz — the narrow waterway through which a large share of the world's oil passes — has pushed up energy and transportation costs, squeezing profit margins at Chinese factories and weighing on global demand. As the world's largest energy importer and a heavily export-dependent economy, China is particularly exposed to such shocks. Factory-gate prices rose in March for the first time in more than three years, signalling that cost pressures are beginning to filter through the broader economy.