China says its economy is accelerating despite Iran war turmoil – for now

By John Liu, Simone McCarthy, CNN

Hong Kong / Beijing (CNN) — Strong exports of electrical and mechanical products supercharged China’s economy in the first three months of the year, with growth exceeding analysts’ expectations even as the Iran war upended global trade and energy markets.

But officials warned of “volatile” external conditions ahead, as the conflict in the Middle East weakens global demand and threatens China’s export reliant economy.

On Thursday, China’s National Bureau of Statistics (NBS) reported a 5.0% increase in Gross Domestic Product from the same period last year. It marked an acceleration from the 4.5% growth reported in the final quarter of last year.

The NBS hailed the “solid start,” while cautioning against domestic and international headwinds.

“External conditions have become more complex and volatile, while structural imbalances at home – marked by strong supply and weak demand – remain pronounced,” Mao Shengyong, deputy commissioner at the NBS, said at a Thursday press conference.

China is the first major economy to report first-quarter GDP figures after the United States and Israel launched a war against Iran in late February.

Already, the economic data released on Thursday is offering a glimpse into how the impact of that war is rippling through the global economy.

Skyrocketing energy prices have increased the costs for raw materials and caused inflation. This could further squeeze Chinese consumers, who are already spending less because of a prolonged real estate crisis that began in 2021.

Export reliance

China has relied on its manufacturing prowess to fuel its export-reliant economy, which boosted its trade surplus to a record-breaking level of 1.2 trillion last year.

But while the country remains relatively insulated from an energy shock with its large amount of oil and gas stockpiles as well as diverse supply sources, its export reliance has also appeared to be a critical vulnerability.

Some worrying signs have emerged. After an impressive first two months of the year with a 21.8% year-on-year surge in exports, that figure plunged to 2.5% in March, as the war, which broke out on the last day of February, slowed shipments and increased logistical costs.

“The upshot is that while the Chinese economy is holding up well, it is becoming ever more dependent on external demand. The Iran War is likely to add to this trend, even if it has a limited impact on headline growth,” said Zichun Huang, a China Economist at financial advisory Capital Economics, in a Thursday note.

Even so, some analysts suggest that the war in the Gulf may not have a major impact on exports across the broader economy in the months to come, and instead cited seasonal distortions from the Chinese New Year holiday for the March downtick. For the full quarter, exports still grew 14.7%, above the 5.5% for the same period in 2025.

That’s because of China’s key strengths: its long-term efforts to upscale its manufacturing for higher value or high-tech goods, as well as its push to dominate green technologies, which the global oil shock is set to make even more in-demand.

“Despite the energy price shock, exports should stay solid in the coming quarters, thanks to strong demand for semiconductors and green technologies,” Huang said in another note earlier this week.

In the first quarter, China’s exports of green technologies did climb. Exports of electric vehicles, lithium batteries, wind turbine goods rose by 78%, 50%, and 45% year on year, customs officials said.

Consumption disappoints

While exports and manufacturing have been strong performers, consumption has disappointed economists.

Industrial output, although slowed down from previous two months, rose more-than-expected to 5.7% from a year ago.

But retail sales reported by the NBS on Thursday showed a decline to a 1.7% year-on-year growth in March from 2.8% in the first two months of the year.

“China’s retail sales momentum is fading as subsidy impacts wane and auto demand softens,” said Ying Zhang, an analyst at the Economist Intelligence Unit, referring to a consumer goods trade-in scheme Beijing started in 2024 to boost spending on goods from household appliances to vehicles.

“The absence of structural reforms so far means consumption will remain a weak growth driver throughout 2026,” said Zhang.

Meanwhile, China’s factory-gate prices turned positive last month for the first time in ‌more than three years as soaring commodity prices, in particular oil, began to weigh on China’s vast industrial powerhouse.

Major Chinese industries have been plagued by overcapacity in recent years, which has given rise to cutthroat price competition that has put deflationary pressure on the economy.

The producer price index (PPI), a gauge of factory gate inflation, increased 0.5% from a year earlier, the data from the NBS showed, bringing the figure back to positive levels for the first time since September 2022.

The end of deflation is something China’s economic planners have been trying to achieve for years as they scrambled to reinflate an economy weighed down by oversupply and weak consumer demand. But analysts warn that this kind of “cost-push inflation” – rather than an organic rise in price alongside a rise in demand – is not the desired fix.

Instead, higher prices for factories, passed on to consumers who already are spending less, could further drag down the economy by squeezing disposable household income more.

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