China’s economy showed signs of resilience in the first quarter of 2026, expanding at a faster pace than expected despite ongoing geopolitical tensions stemming from the war in the Middle East. Official data released Thursday by China’s National Bureau of Statistics indicated that gross domestic product (GDP) grew 5 percent year-on-year, marking the fastest quarterly increase in three quarters. Sequential growth also accelerated, with quarterly GDP rising 1.3 percent on a seasonally adjusted basis, the strongest since late 2024.

Industrial production emerged as a key driver of growth, rising 5.7 percent in March compared to a year earlier, surpassing market forecasts. This manufacturing strength was supported by robust exports, including a surge in shipments of high-tech products such as semiconductors and electric vehicles, partly fueled by growing investments in artificial intelligence. Analysts noted that China’s efforts over recent years to enhance energy security and insulate itself from external shocks helped contain the economic fallout from the conflict involving Iran.

However, consumer spending showed continued weakness. Retail sales growth slowed to 1.7 percent in March, a decline from the 2.8 percent increase recorded in the first two months of the year. Domestic car sales, a key consumer indicator, fell nearly 8 percent in the first quarter, influenced in part by the removal of government subsidies. The real estate sector also remained fragile, with outstanding mortgage balances dropping by more than 40 percent year-on-year in March, signaling ongoing hesitancy among households to take on new debt despite a rebound in home sales in major cities like Shanghai.

Fixed-asset investment posted a slight improvement, rising 1.9 percent in the first quarter, driven largely by delayed infrastructure projects that resumed early this year after a contraction in 2025. Nonetheless, government bond issuance—an important funding source for such projects—declined compared with the previous year.

Economists are interpreting the data as evidence of uneven recovery, with the manufacturing and export sectors propelling growth while domestic demand remains sluggish. The mixed performance is consistent with China’s recently lowered GDP target of 4.5 to 5 percent for 2026, the lowest set since 1991. The data has led some financial institutions to revise upward their growth forecasts for China this year, with estimates ranging around 4.6 to 4.9 percent.

Policymakers appear to be adopting a cautious stance, with expectations that stimulus measures will be limited in the near term. Inflation concerns, partly due to elevated oil prices influenced by the Middle East conflict, have tempered prospects for interest rate cuts this year. Observers suggest that Beijing’s future policy moves will hinge on the trajectory of the global economy, particularly the United States, and the ongoing boom in artificial intelligence, which continues to support China’s export sector despite external uncertainties.

Meanwhile, the International Monetary Fund has slightly lowered its forecast for China’s growth in 2026 to 4.4 percent but noted this downgrade is modest relative to the broader global economic outlook amid the geopolitical tensions and energy market volatility.