China’s economy shows stronger start to 2026, but global turmoil clouds outlook

BEIJING: China’s economy opened 2026 with stronger-than-expected momentum, as industrial production accelerated and both retail spending and investment improved in the first two months of the year. The upbeat start offers some reassurance to Chinese policymakers, though rising geopolitical tensions and weak domestic confidence continue to cast a shadow over the broader outlook.

Fresh data released by China’s National Bureau of Statistics (NBS) showed industrial output grew 6.3 per cent year-on-year in January-February, an improvement from 5.2 per cent in December. The figure was well above market expectations of 5 per cent and marked the fastest pace of factory growth since September 2025.

Much of that strength appears to have come from a rise in exports, particularly in technology-linked sectors benefiting from surging global demand for AI-related products. That export momentum also lifted related manufacturing industries upstream.

Economists said the latest numbers suggest China entered the year in better shape than many had expected, even as external risks intensify.

Retail sales, which are closely watched as a measure of consumer demand, rose 2.8 per cent in the January-February period. That compared with 0.9 per cent growth in December and exceeded analyst forecasts of 2.5 per cent. It was the strongest reading since October last year.

Part of that increase was likely tied to the extended Lunar New Year holiday in February, which supported travel and seasonal spending. Total tourism expenditure during the holiday period rose nearly 19 per cent from a year earlier. Still, spending per domestic trip slipped 0.2 per cent, suggesting households remain cautious despite the seasonal uplift.

That caution is also visible elsewhere. Passenger vehicle sales in the domestic market, for example, fell sharply in the first two months of the year, highlighting the continued softness in consumer appetite for big-ticket purchases.

China releases combined January-February data each year to reduce distortions caused by the shifting timing of the Lunar New Year, which can fall in either month.

Investment data also offered some relief. Fixed asset investment, which includes spending on infrastructure and property, increased 1.8 per cent in the first two months of 2026. That was a notable turnaround from expectations of a decline and followed a 3.8 per cent contraction in 2025, the first annual fall in roughly thirty years.

The recovery was led by infrastructure, where investment climbed 11.4 per cent as state support and new bank financing tools for major projects began feeding into the economy.

Even so, analysts say the broader picture remains uneven. China is still relying heavily on external demand and state-backed investment, while household consumption remains fragile. That imbalance could weigh on longer-term growth if not addressed more decisively.

Some economists warned that domestic demand could come under renewed pressure in March. At the same time, recent lending figures indicated households are still reluctant to borrow, reinforcing concerns about consumer weakness.

The labour market also remains under strain. The nationwide surveyed urban unemployment rate rose to 5.3 per cent in the first two months of 2026, up from 5.1 per cent in December, according to the NBS.

At a job fair in Beijing, a recent graduate surnamed Bai said the employment environment remained difficult, adding that securing work had become increasingly challenging.

Last week, China wrapped up its annual parliamentary session with officials setting a 2026 growth target of 4.5 to 5 per cent, slightly below last year’s goal of around 5 per cent. China met its 2025 target largely thanks to a record $1.2 trillion trade surplus, a figure that heightened tensions with several trading partners.

While authorities promised stronger support for household consumption this year, analysts noted that the measures announced so far do not amount to an aggressive push to revive domestic demand.

Complicating matters further is the war in the Middle East, which has raised concerns over oil prices, trade flows and broader market stability. Officials and economists say the fallout from the conflict could begin showing up more clearly in coming months.

NBS spokesperson Fu Linghui said the conflict had already fuelled volatility in crude prices and unsettled markets, though he argued that China’s domestic energy supply position would help cushion some of the external pressure. He added that the effect on prices inside China would need closer monitoring.

Economists also say the conflict has made the diplomatic and economic picture more complicated ahead of US President Donald Trump’s expected late-March visit to Beijing for talks with President Xi Jinping.

Some analysts believe Beijing may respond with further fiscal support if global conditions deteriorate. Others say markets will be watching closely to see whether the upcoming leaders’ meeting produces any moves to ease trade tensions, particularly as China faces growing pressure over its trade surplus while also navigating new instability from the Middle East crisis.