China surprised markets with 5.0% year-on-year growth in the January–March quarter, shrugging off an immediate hit from the Iran war. Exports and factory activity were the main support, but economists warn that higher energy prices and a protracted conflict could weigh on growth later in the year.

Snapshot: growth stronger than expected

Official data for the first quarter showed gross domestic product rising 5.0% compared with the same period a year earlier, surprising markets concerned about an immediate hit from the Iran war. Exports remained a key support, though momentum eased in March when year-on-year export growth slowed to 2.5%.

  • Q1 GDP: 5.0% year-on-year
  • Previous quarter: 4.5%
  • March export growth: 2.5% year-on-year

The headline number masks strains beneath the surface. China's long-running property slump has sapped household and investor confidence. Manufacturing orders are holding up, but consumption has been patchy. Energy costs have ticked higher since the conflict began—pushing up input prices for industry and adding to inflationary pressure in places.

Economists: short-term resilience, longer-term risks

“China can likely weather short-term disruptions, but a protracted war and higher for longer energy prices would likely start to bite into growth by the second half of the year,” said Lynn Song, chief economist for Greater China at ING, summarising the mainstream view among forecasters.

Song noted the timing of the conflict spared the quarter’s early data but warned that energy-price shocks travel through shipping and production chains with a lag, squeezing margins for firms.

Mastheads

Eswar Prasad, professor of economics and trade policy at Cornell University, added a global angle. “The lack of a speedy resolution to the Iran war is likely to dent global growth, which will negatively impact other economies’ ability to absorb Chinese exports,” he said.

Policy room and the limits of stimulus

Beijing set a growth target this year of 4.5% to 5.0%. The IMF has revised its projection for China’s expansion to 4.4% for 2026, citing weaker external demand and other headwinds.

Analysts say the authorities have a limited set of tools. Lowering interest rates is possible, but monetary policy is already looser than a few years ago. That leaves fiscal action—public investment, infrastructure projects and targeted support for distressed sectors—as the most direct lever to shore up growth.

“An increase in public sector investment would stabilise headline growth but, unless household demand strengthens significantly, could intensify underlying deflationary pressures and increase the economy’s reliance on exports down the line,” Prasad said. The implication is clear: stimulus can buy time, but it may not fix deep structural issues such as weak consumer spending or the housing market’s malaise.

Trade, prices and global knock-on effects

China’s trade surplus swelled to near-record levels in recent years, supported by strong overseas demand and, at times, by firms shifting supply chains. That helped cushion growth even as domestic demand lagged. But a world economy buffeted by conflict could reverse those gains.

Higher oil and gas prices lift production costs worldwide, affecting energy-intensive industries and countries that import hydrocarbons. For the UK, a slowdown in global trade flows and a softening in Chinese import demand would add another headwind to already-challenged growth.

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Beijing's growth target for the year — 4.5–5.0% — leaves little room for manoeuvre if the Iran war drags on.

This article was created with AI assistance.