China’s economy kicked off 2026 on a stronger note, with factory output accelerating and gains in retail sales and investment providing early positive signals to policymakers.

This comes amid heightened global uncertainty from the ongoing Iran–Israel War 2026, which involves the United States, Israel, and Iran following U.S.-Israeli airstrikes that began on February 28.

The improved performance stemmed partly from a surge in exports driven by robust global demand for artificial intelligence-related technology, which also bolstered upstream manufacturing.

Analysts cautioned, however, that escalating geopolitical tensions, subdued consumer confidence, and disruptions to global trade and energy markets could still dampen future prospects.

According to data from the National Bureau of Statistics released on Monday, industrial output rose 6.3 percent year-on-year in January and February, up from December’s 5.2 percent growth.

This exceeded the 5 percent expansion predicted in a Reuters poll and represented the fastest pace 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 measure of consumption, increased 2.8 percent, improving from December’s 0.9 percent rise and marking the strongest gain since October last year. Analysts had forecast 2.5 percent growth.

The uptick was supported by extended Lunar New Year celebrations in February, which drove tourism spending up nearly 19 percent compared to the prior year’s shorter holiday period.

Spending per domestic tourism trip, however, dipped 0.2 percent, reflecting ongoing consumer caution.

Separate data from last week indicated a sharp 26 percent drop in domestic passenger vehicle sales over the first two months.

China combines January and February data to minimize distortions from the variable timing of the Lunar New Year holiday.

The figures offered reassurance to policymakers, as an unexpected rise in investment helped counter the ongoing property sector downturn.

Fixed asset investment, covering property and infrastructure, grew 1.8 percent in the January-February period. This defied forecasts of a 2.1 percent decline, following a 3.8 percent contraction in 2025—the first annual drop in nearly three decades.

Infrastructure spending led the rebound, surging 11.4 percent as policy measures, including a new bank financing tool for major projects, took hold.

Despite these positives, analysts highlighted a persistent divide between robust external demand and fragile domestic consumption, which could limit long-term growth.

“It cannot be ruled out that domestic demand data in March will still face downward pressure,” said Zhaopeng Xing, although he noted that the latest figures do not warrant an immediate interest rate cut.

Last week’s lending data showed continued weakness in household borrowing.

Labour market strains persisted, with the nationwide survey-based unemployment rate climbing to 5.3 percent in the first two months from December’s 5.1 percent.

“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.

At the recent annual parliamentary session, policymakers set this year’s growth target at between 4.5 percent and 5 percent, down from last year’s “around 5 percent.” The 2025 target was met mainly through a record $1.2 trillion trade surplus, raising concerns among trading partners.

Economists emphasized that China faces significant challenges in achieving sustainable long-term growth.

While the government committed to a “notable” boost in household consumption, analysts observed few concrete steps toward bold demand-side reforms.

The Middle East conflict has intensified uncertainty by driving up energy prices and rattling global trade, adding complexity to Donald Trump’s planned late-March visit 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.”