China's economy beats forecasts in surprise start to 2026
What's the story
China's economy has shown better-than-expected performance at the start of the year, with industrial production and retail sales both exceeding forecasts. However, the ongoing conflict in the Middle East threatens to disrupt this positive momentum by impacting China's export outlook. The National Bureau of Statistics reported a 6.3% increase in industrial production for January-February 2026 compared to last year—its fastest growth since September and an improvement from December's 5.2%.
Economic indicators
Retail sales and fixed-asset investment also show unexpected gains
Retail sales also witnessed an unexpected rise of 2.8% in the first two months of 2026, surpassing economists' median forecast of 2.5%. This marks a significant acceleration from December's 0.9%. Meanwhile, fixed-asset investment unexpectedly expanded by 1.8% during the same period after contracting for the first time on record in 2025. These figures provide an official snapshot of China's economic state this year as it usually publishes combined data for January and February to account for Lunar New Year distortions.
Trade tensions
Impact of Middle East conflict on global growth and inflation
The escalating conflict in the Middle East has disrupted energy markets and trade. While China is less vulnerable to an oil price shock than other major Asian economies, its export machine is exposed to threats posed by global growth and inflation. Beijing has lowered its annual economic growth target to a modest 4.5%-5%, the least ambitious goal since 1991 but from a much larger base of gross domestic product (GDP).
Export dependence
China's export outlook amid ongoing war
China's increasing dependence on exports for growth is straining relations with trading partners and not benefiting households. The country's export outlook now depends on how long and intense the ongoing war will be, which started with US and Israeli strikes against Iran on February 28. Despite these challenges, Chinese authorities have been cautious in their approach, opting to wait for developments rather than introduce new policies hastily.