China offers global growth a well-timed boost
5.0%yr growth in Q1 2026 is a significant achievement, and the Middle East conflict is likely to accelerate demand for Chinese goods from here. Still, the growth base needs to broaden.
China’s economy has offered the world a well-timed boost, annual growth accelerating from 4.5%yr in Q4 2025 to 5.0%yr in Q1 2026. Authorities noted this was despite an unfavourable base effect, annual growth having previously peaked at 5.4% in Q4 2024 and Q1 2025. Quarterly growth was also a touch stronger in Q1 2026 than Q4 2025, at 1.3% versus 1.2%.
From the monthly partial data, China’s Q1 momentum was principally due to the strength of exporters and the investment being undertaken across the economy. The trade surplus averaged $88bn through Q1, broadly in line with the average of 2024 and 2025. Moreover, the narrowing of the surplus in March came as a result of a surge in imports which is likely to, at least, partly reverse in coming months as exports continue to grow. The Middle East conflict is likely to sustainably increase demand for green technology from China, opening up an opportunity for the trade surplus to reach new historic highs.
Regarding investment, transport and storage-related infrastructure spending reportedly surged in early-2026, while manufacturing investment showed signs of entering a (modest) upswing and utilities investment continued to compound around 9%ytd. Within the manufacturing sector, stronger demand for green technology goods and refined energy products is likely to elicit an upturn in capital expenditure through 2026, with the key investment sub-categories of electrical machinery, automobiles (EVs) and chemicals all showing evidence of stabilisation in Q1. There is reason for guarded optimism over the outlook for property investment too, the year-to-date decline having moderated from -17%ytd at December to -11%ytd in February and March. Still equivalent to circa 15% of GDP, an end to the sharp construction declines of recent years could provide a material boost to aggregate growth through 2026.
The support offered to GDP by external demand and investment masks the still-troubled state of consumer demand, however. Having surprised to the upside in February at 2.8%ytd, in March retail sales growth slowed once again to 2.4%ytd. While not a disastrous outcome by any means, it is less than half the average pace of the past five years post pandemic, a historically-weak period for household demand growth. Policy makers have been clear in their intent to provide additional support to households, but are yet to action plans. And, while equities have risen through the year, house prices continue to decline, weighing on wealth and sentiment.
All told, China is likely to benefit from the Middle East conflict by scaling up production and exports of green technology and refined energy products/chemicals to meet global demand. This will likely help GDP growth edge closer to 5.0% in 2026 and hold at or above 4.5% in 2027. Still, to sure up future growth prospects, authorities must action their intended support for households and incentivise additional domestically-focused investment by private and public entities. Without this broadening of the growth pulse, aggregate momentum will remain susceptible to slipping towards, or through, 4.0% in coming years. Following President Trump’s May visit and (hopefully) a lasting end to the Middle East conflict, we expect stimulus to be delivered.
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