(Bloomberg) — China\u2019s economic growth rebounded more than expected in the first quarter, suggesting limited spillovers so far from the war in Iran but revealing few signs of turnaround in weak consumer spending.<\/p>\n
Powered by strong manufacturing and exports, gross domestic product expanded 5% from a year ago, the fastest in three quarters, according to a statement from the National Bureau of Statistics on Thursday. GDP also saw the quickest sequential growth since the final three months of 2024, with a gain of 1.3% from the prior quarter on a seasonally adjusted non-annualized basis.<\/p>\n
Highlighting the divergence between major parts of the economy, industrial output grew a more-than-forecast 5.7% in March from a year ago. By contrast, retail sales fell short of expectations with an increase of 1.7%, down from a 2.8% expansion in the first two months.<\/p>\n
\u201cThe manufacturing side of the economy remains resilient and is still a key near-term growth anchor,\u201d said Hao Zhou, chief economist at Guotai Junan International in Hong Kong. \u201cLooking ahead, China\u2019s macro agenda is likely to center on two intertwined priorities: reflation and boosting domestic demand.\u201d<\/p>\n
The war, now in its seventh week, has yet to threaten the momentum that built at the start of 2026, thanks in part to China\u2019s moves in past years to strengthen energy security and insulate its economy from global turmoil. Years of deflationary pressure have also blunted the potential for an immediate impact on consumer prices from higher oil costs.<\/p>\n
Despite little evidence of improvement in domestic demand, the latest official assessment of the economy will likely reduce the urgency for additional stimulus, especially after Beijing adopted a more flexible approach toward growth by lowering its GDP goal to a range of 4.5% to 5% \u2014 the lowest since 1991.<\/p>\n
The upside surprise prompted Deutsche Bank AG and Barclays Plc to upgrade their forecasts for real growth in China\u2019s GDP this year to 4.9% and 4.6%, respectively.<\/p>\n
The GDP expansion pace stands out especially because growth was particularly strong a year ago due to a rush of exports before US tariffs kicked in. That created a high base of comparison, and prompted Mao Shengyong, deputy commissioner at the NBS, to describe the result as \u201cprecious\u201d given the \u201csevere\u201d external environment.<\/p>\n
\u201cOverall, the main macro indicators rebounded in the first quarter, and new drivers are growing rapidly,\u201d Mao said at a briefing in Beijing. \u201cBut we also need to see that the external situation is more complex and volatile, and the imbalance between strong domestic supply and weak demand is still stark.\u201d<\/p>\n
Rapid growth in tech sectors continued to drive industrial production as well as exports, which surged 15% in the first quarter from a year ago.<\/p>\n
High-tech output expanded 12.5% in the first quarter, much faster than the 6.4% gain in manufacturing as a whole. Industrial robots and integrated circuits surged 33% and 24% respectively.<\/p>\n
Overall, manufacturing contributed nearly a third of economic growth in the quarter, according to Mao.<\/p>\n
What Bloomberg Economics Says …<\/p>\n
\u201cThe good news in China\u2019s GDP report \u2014 a sharp acceleration in growth marks a strong start to the year. Less good \u2014 it\u2019s on a shaky foundation. Domestic drivers sputtered, with retail sales and investment slowing.\u201d<\/p>\n
\u2014 Chang Shu and David Qu; click here to read the full report<\/p>\n
In a sign of ripples from the energy crisis stemming from the war in Iran, the output of refined oil fell 2.2% in March. That showed refiners cut run rates to conserve supplies snarled by conflict in the Middle East.<\/p>\n
Contrasting with the strong gains made by factories, consumer spending and private investment continued to cool, resulting in an increasingly lopsided economy. The surveyed urban jobless rate unexpectedly climbed in March to 5.4%, the highest in a year.<\/p>\n
Household spending per capita only grew 2.6% in price-adjusted terms, its worst pace of year-to-date expansion since the final quarter of 2022. Wage incomes also increased the slowest since late 2022.<\/p>\n
Fixed-asset investment gained 1.7% in the first three months of the year, slightly weaker than the 1.8% increase in the first two months. Property investment slumped 11.2%. Private investment declined in the period for the first time on record, outside the pandemic year of 2020.<\/p>\n
\u201cIt\u2019s too soon to call China out of the doldrums,\u201d said Carlos Casanova, senior Asia economist at Union Bancaire Privee in Hong Kong. \u201cWeakness in the private sector is feeding into rising unemployment \u2014 an increasingly sensitive political issue likely to prompt targeted stimulus, especially given the private sector\u2019s outsized role in job creation.\u201d<\/p>\n
A major drag on retail sales came from purchases of cars, furniture and home appliances, which led declines in March by dropping 12%, 9% and 5%, respectively. That reflected a diminishing impact of the government\u2019s trade-in subsidies, a program that was scaled back for cars this year.<\/p>\n
The Communist Party\u2019s ruling Politburo is set to hold a meeting focusing on the economy at the end of April, where it will provide clues about future policies.<\/p>\n
Some economists are expecting only targeted policy help. Officials will likely hold off on major stimulus until the economy encounters a major speed bump.<\/p>\n
\u201cWe expect the policymakers to focus on implementing existing policy easing measures,\u201d said Xiaojia Zhi, an economist at Credit Agricole CIB. \u201cThey will likely introduce targeted fiscal support and relief measures to manage the energy price shocks and alleviate cost pressures.\u201d<\/p>\n
Zhi also expects public spending on strategic investment projects to accelerate, since the Iran conflict will reinforce China\u2019s determination to strengthen national security. This would also help cushion any near-term growth pressures if external demand deteriorates, she added.<\/p>\n
A rising number of economists is forecasting the People\u2019s Bank of China won\u2019t cut interest rates this year, because the oil shock pushed up inflation expectations.<\/p>\n
Still, Bloomberg Economics predicts the PBOC will loosen policy this quarter by lowering the reserve requirement ratio by 25 basis points, followed by additional fiscal stimulus from the government later in the year, in an effort to \u201cturn up support\u201d and maintain China\u2019s easing stance.<\/p>\n
Economy-wide prices didn\u2019t rise in the first quarter as some analysts had expected, even though their decline narrowed as a result of the oil shock. Producer prices turned positive in March for the first time after three and a half years of deflation.<\/p>\n
The GDP deflator, a measure of price changes across the economy, fell 0.1% in the first quarter, according to calculations by Bloomberg based on official nominal and real growth numbers. That\u2019s the 12th straight quarter of decline.<\/p>\n
But as Chinese companies emerge from deflation, Deutsche Bank\u2019s Yi Xiong and Deyun Ou expect the benefits from a \u201csustained improvement\u201d in their sales and profits to flow through to the economy. The German lender\u2019s upgraded estimate for this year\u2019s real GDP implies its forecast for nominal economic growth rises to 6.5% \u2014 which would be its highest level since 2022.<\/p>\n
\u201cToday\u2019s first-quarter GDP release delivered another important message: this is not stagflation, as China\u2019s economy is also expanding in quantity amidst price increases,\u201d the Deutsche Bank economists said. \u201cHigher nominal growth could improve Chinese corporates\u2019 revenue and profitability, further supporting the recovery of investment and household income.\u201d<\/p>\n
–With assistance from Jacob Gu, Jing Li and Qianwei Zhang.<\/p>\n
(Updates with forecast upgrades in seventh paragraph, adds economist comments in final two.)<\/p>\n