China’s economy opened the year with stronger momentum as factory production accelerated and both retail sales and investment improved in January and February, offering early encouragement to policymakers amid growing uncertainty linked to the Iran–Israel War 2026 involving the United States, Israel and Iran.
The improved performance followed a spike in exports fueled by strong global demand for artificial intelligence-related technology, which also supported upstream manufacturing activities.
However, analysts warned that geopolitical tensions, weak consumer confidence and disruptions in global trade and energy markets could still weigh on the outlook.
Data released on Monday by the National Bureau of Statistics showed that industrial output increased by 6.3 percent compared with the same period last year, rising from December’s 5.2 percent growth.
The figure surpassed the 5 percent expansion forecast in a Reuters poll and marked the fastest pace of growth since September of the previous year.
“While risks to the outlook have increased amid geopolitical tensions and disruptions to global trade and energy markets, the latest figures indicate that China entered the year with a firmer growth footing than previously thought,” said Hao Zhou.
Retail sales, a key indicator of consumption, climbed 2.8 percent, accelerating from the 0.9 percent increase recorded in December and representing the strongest rise since October last year. Analysts had projected a 2.5 percent increase.
Part of the momentum was attributed to the country’s extended Lunar New Year celebrations in February. The festive period boosted overall tourism spending by nearly 19 percent compared with the same holiday season a year earlier, which lasted one day less.
However, spending per domestic tourism trip slipped by 0.2 percent, indicating continued caution among consumers.
Earlier data released last week also showed a sharp decline in domestic passenger vehicle sales, which fell by 26 percent during the first two months of the year.
China typically combines economic data for January and February to reduce distortions caused by the Lunar New Year holiday, which may occur in either month.
The latest figures also provided some reassurance for policymakers as an unexpected rise in investment partially offset the prolonged slump in the country’s property sector.
Fixed asset investment, which includes spending on property and infrastructure, rose 1.8 percent in the first two months of the year. This defied expectations of a 2.1 percent decline after the sector contracted by 3.8 percent in 2025, its first annual fall in nearly 30 years.
Infrastructure spending drove much of the recovery, increasing by 11.4 percent as policy support measures — including a new bank financing tool aimed at funding major projects — began to take effect.
Despite the encouraging signals, analysts noted that a significant gap remains between strong external demand and weak domestic consumption, a disparity that could hinder China’s long-term economic prospects.
“It cannot be ruled out that domestic demand data in March will still face downward pressure,” said Zhaopeng Xing, although he added that the latest figures do not justify an interest rate cut in the near future.
Lending data released last week also pointed to a continued slump in household borrowing.
Meanwhile, labour market pressures remain evident. According to the statistics bureau, the nationwide survey-based unemployment rate rose to 5.3 percent in the first two months of the year from 5.1 percent in December.
“The current employment landscape remains challenging and jobs are hard to find,” said a college graduate surnamed Bai, who studied education and attended a job fair in Beijing.
During the annual parliamentary meeting that concluded last week, policymakers set China’s economic growth target for the year at between 4.5 percent and 5 percent, lower than last year’s goal of “around 5 percent.” The 2025 target was achieved largely due to a record trade surplus of $1.2 trillion, which heightened concerns among some of China’s trading partners.
Economists say the country still faces major hurdles as it seeks to establish sustainable long-term growth.
Although the government pledged a “notable” increase in household consumption, analysts said the policy announcements contained few measures suggesting a shift toward aggressive demand-side reforms.
The conflict in the Middle East has also added uncertainty by pushing up energy prices and unsettling global trade, raising the stakes ahead of a planned late-March visit by Donald Trump to Beijing for talks with Xi Jinping.
Fu Linghui told reporters on Monday that the war in the Middle East has triggered volatility in oil prices and increased market anxiety, but noted that China’s domestic energy supplies should help cushion the impact of external shocks. He added that further observation would be needed to assess the conflict’s effect on domestic prices.
“The turmoil in the Middle East is set to show its impact on the global economy in coming months… I expect policymakers to respond through fiscal policy if necessary,” said Zhiwei Zhang.
“The market will focus on the upcoming meeting between the Chinese and American leaders. While China will likely purchase more goods from the U.S. to mitigate the trade imbalance, the war in the Middle East has made the meeting complicated.”
