Why China’s strong Q1 print won’t last

On the surface, China’s economy looks fine. 

• GDP grew 5.0% y/y in Q1, faster than Q4’s 4.5% growth, and at the upper range of Beijing’s annual growth target of 4.5-5%.

So China’s economy has shrugged off the Iran war and entered 2026 in good shape, right?

• Not so fast.

Despite the punchy headline growth rate, economic momentum was clearly fading as Q1 drew to a close.

• The war’s full impact – on supply chains, export demand, and input costs – is only partially reflected in the Q1 data. 
• March’s data – which better reflects the war’s impacts – slowed across the board as the fallout from supply chain disruptions began to bite.
• This means the direction of travel heading into Q2 is noticeably weaker than the quarterly average indicates.

There are two major headwinds I want to discuss.

The first is consumption.

• Retail sales of consumer goods grew just 1.7% y/y in March, down from the already sluggish 2.8% in January-February. 

Real household incomes, meanwhile, only grew 4.0% y/y across Q1, extending a multi-year slowdown.

• In the three years before COVID, disposable income grew at an average annual rate of 6.5%.
• By 2023, it had slipped to 6.1%, then to 5.1% in 2024, and then to 5.0% in 2025.
• Q1 2026 data suggests growth will decline again this year.

And the property slump continues to erode household wealth.

• Second-hand home prices fell 0.24% m/m in March, and are now down almost 25% from their 2021 peak. 

The combination of slowing income growth and collapsing property values has made consumers deeply reluctant to spend.

• The household savings rate hit 37.8% in Q1, the highest level on record outside the pandemic.

Against this already fragile backdrop, the Iran war has delivered an energy price shock that could not have come at a worse time. 

• Consumer transport fuel costs rose 10% m/m in March. 
• Meanwhile, as I discussed a couple of weeks ago, producer prices unexpectedly turned positive in March.

The upshot: As higher costs work their way through supply chains, they will further erode real household incomes and squeeze already-limited discretionary spending.

The second major headwind is a sharp slowdown in export growth – the engine that China’s economy has relied on to offset weak domestic demand. 

• Exports grew a meek 2.5% y/y in March, while the trade surplus shrank to USD 51.1 billion, the lowest monthly reading in four years.

And things could get a whole lot worse.

• The countries driving China’s export diversification push – across Southeast Asia, South Asia, and Africa – are precisely the ones being hit hardest by the global energy shock.
• These are heavily import-dependent economies, where higher oil prices rapidly feed through to broader inflation, hammering household purchasing power.
• Consumers across these markets are cutting discretionary spending and prioritizing essentials – a dynamic that will further weigh on Chinese exports in the coming months.

So what should we take from all this?

China’s strong Q1 GDP print may give policymakers a bit of breathing room – but not much.

• The Iran war has scrambled what was supposed to be an orderly exit from deflation. 
• The emerging economies that China has spent two years cultivating as export alternatives to the US are now grappling with their own energy crises. 

This means China’s export engine, the economy’s most reliable growth driver, faces headwinds from both the supply and demand sides.

Beijing needs to engineer a boost in domestic demand – but that won’t happen as long as income growth and the real estate market remain in the doldrums. 

• We can rule out a push to reinflate property prices – as Beijing has clearly signaled that’s not in the cards.
• That leaves deep, structural reform of China’s social safety net and income distribution system as the only credible option – something Beijing has been reluctant to pursue at scale.

The big question: Will the mounting, unexpected headwinds to external demand compel Beijing to rethink its cautious fiscal stance?

Next stop: The upcoming April Politburo economic meeting could give us a read on whether that calculus is changing.

• If officials indicate willingness to go beyond incremental measures – and pursue the kind of household-focused structural support that could actually move the needle on consumption – Q2 could surprise to the upside.
• But if they stick to the familiar playbook, things are likely to get worse before they get better.

Get in touch to discuss how we can help you track policy signals and economic developments – and explain what they mean for your business.

Joe Peissel, Senior Macroeconomic Analyst, Trivium China