China’s economy grew at a faster pace than expected in the first quarter of this year, expanding 5% from a year earlier as it largely shrugged off impacts from the Iran war so far, according to data released Thursday.
The January-March data released by the government, covering a period when the Iran war began, were better than economists expected and up from the 4.5% growth seen in the October-December quarter, which was a three-year low. The forecasts for the first-quarter gross domestic product (GDP) growth stood at 4.8%.
The 5.0% year-over-year pace in the first quarter sits at the top of China's full-year target range of 4.5%-5.0%, highlighting resilience that sets it apart from much of Asia, helped by ample strategic oil reserves and a diversified energy mix.
Yet the Middle East conflict lays bare a core vulnerability: an export-led growth model that delivers annual trade surpluses the size of the Dutch economy depends on open sea lanes – for China and for the customers it sells to.
And as the world's biggest energy importer and manufacturing powerhouse, soaring oil prices threaten to drive up production costs and squeeze already thin margins at factories that employ hundreds of millions of people. The longer the conflict drags on, the higher the risks and the pressure is already mounting.
On a quarter-on-quarter basis, China's economy grew 1.3% in the first three months, the fastest pace in a year.
Economists expect China, the world's second-largest economy, to be able to weather short-term impacts from the Iran war, now in its seventh week. The war is pushing energy prices higher, worsening inflation and impacting global economic growth. But in the longer term, areas including global demand for Chinese exports could take a hit.
The International Monetary Fund (IMF) this week trimmed its economic growth estimates for China to a 4.4% for 2026 as it lowered its global growth forecasts over the Iran war shocks.
Chinese leaders last month set an economic growth target of 4.5% to 5% for this year, the slowest since 1991.
"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 Dutch bank ING.
Also on Thursday, government data showed industrial output in China rose 5.7% in March year-over-year, better than market expectations, as global demand for Chinese exports of electronic equipment, autos, semiconductors and robotics remained strong.
Retail sales were also up 1.7% from a year earlier, albeit worse-than-estimates and slower than the 2.8% growth in January and February, reflecting sluggish domestic demand for consumer goods.
A years-long real estate sector slump in China has dragged consumer and investor confidence, but the country managed to achieve its targeted "around 5%” growth last year, powered by robust exports that drove its trade surplus to a record nearly $1.2 trillion despite U.S. President Donald Trump’s higher tariffs.
China's exports will continue to be key in propelling its economy this year, economists believe, but reliance on export growth could now increasingly become a problem.
"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," said Eswar Prasad, a professor of economics and trade policy at Cornell University.
"At a time when all countries are trying to protect their firms, households and economies from the fallout of the Iran war, the appetite for Chinese imports is clearly shrinking," he explained.
On Tuesday, China reported its exports grew 2.5% in March from a year ago, significantly slowing from the previous two months, although some analysts partly attributed that to seasonal distortions.
China could likely still attain its full-year economic growth target through policy stimulus measures, economists say, but there are other concerns.
A boost in public sector investment, Prasad said, would stabilize headline growth but, unless household demand strengthens significantly, could intensify underlying deflationary pressures and increase the economy’s reliance on exports down the line.
