China's Q1 economic rebound faces rough seas as Iran war jolts global outlook

* China's Q1 GDP growth picks up to 5.0% from Q4's 4.5%

* Retail sales growth and industrial output cool in March,

* Iran war raises growth and inflation risks, set to test policymaking

* Measured stimulus expected in 2026 as China targets 4.5-5% growth

By Kevin Yao

BEIJING, April 16 (Reuters) - China's economy picked up speed early in 2026 powered by a burst of exports that masked weak domestic demand, but Beijing warned of a "complex and volatile" environment as the Iran war jacks up energy prices and hits global demand.

The conflict in the Middle East has exposed a key fault line: as the world's biggest energy importer and a heavily export-reliant economy, China is vulnerable to an oil shock already slowing trade, lifting factory costs and darkening the outlook for the year.

China's gross domestic product rose 5.0% over the first quarter from a year earlier, National Bureau of Statistics data showed on Thursday, beating analysts' expectations in a Reuters poll for growth of 4.8% and compared with a 3-year low of 4.5% in the fourth quarter.

"The international environment in the next stage will be complex and volatile, with an increase in uncertain and hard-to-predict factors," Mao Shengyong, the NBS' deputy head, told a press conference, underscoring policy risks from the Iran war that have rattled financial markets and upended the global economic outlook.

Industrial output in the world's second-largest economy rose 5.7% in March from a year earlier, slowing from 6.3% growth in January-February, while retail sales, a gauge of consumption, grew 1.7% last month, down from the 2.8% gain in January-February. Analysts had forecast a 2.3% rise.

"The manufacturing side of the economy remains resilient and is still a key near-term growth anchor," said Zhou Hao, an analyst at Guotai Haitong Securities. "Looking ahead, China's macro agenda is likely to centre on two intertwined priorities: reflation and boosting domestic demand."

The problem facing policymakers is that even China - long faulted for subsidy-fuelled, cut-price manufacturing - is not immune as higher fuel and transport costs erode buyers' purchasing power.

For Peng Xin, general manager of Guangdong Rongsu New Materials in southern China's Dongguan, the turmoil in the Gulf has stripped him of certainty. With energy prices - and thus key input costs - whipping beyond his control, every order has become a fresh negotiation. Customers, equally rattled, are racing to stockpile supplies, bracing for the possibility that prices will climb even higher if the conflict drags on.

"If someone previously only purchased 5 tonnes, they might want ten tonnes now. Therefore, my production and shipment volumes this month are quite large," he added.

China's exports grew just 2.5% in March year-on-year, slowing sharply from 21.8% in January-February as the conflict drove up energy and transportation costs and weighed on global demand, though analysts cautioned the figure was also distorted by seasonal factors.

For the January-March period, exports still rose 14.7% from a year earlier, well above the full-year growth of 5.5% in 2025.

"On one hand you see resilience - the Iran war's impact on China is very limited. On the other hand you see imbalance - a strong export sector versus a modest domestic demand," said Xu Tianchen, senior economist at the Economist Intelligence Unit.

Early signs of strain are emerging, however. China's factory-gate prices rose in March for the first time in more than three years, signalling that energy-driven cost pressures are seeping into the world's second-biggest economy and threatening already-thin corporate margins.

On a quarterly basis, the economy expanded 1.3% in January-March, in line with the poll, and compared with 1.2% growth in October-December.

Growth of fixed-asset investment eased to 1.7% in the first quarter from 1.8% in January-February - when infrastructure investment jumped 11.4% year-on-year.

POLICY SUPPORT

China has pledged to step up spending on major infrastructure and public services to help meet the 2026 growth target, the first year of the new five-year plan.

Breaking China's protracted property slump will be critical to reviving domestic consumption, but fresh data showing new home prices still falling suggest the pain for the country's embattled developers is far from over. Beijing has set a budget deficit of around 4% of GDP for 2026 and lined up heavy bond issuance to support growth, while the central bank has pledged to keep policy accommodative despite limited room to cut rates as inflation edges higher.

China's Politburo, a top decision-making body of the ruling Communist Party, is expected to meet later this month to assess the economic outlook.

Policymakers have acknowledged an "acute" imbalance between strong supply and weak demand, and have vowed to "significantly" lift household consumption's share of the economy over the next five years, though no specific target has been set.

Analysts polled by Reuters expect the central bank to keep the benchmark one-year loan prime rate unchanged through the end of 2026, while cutting banks' weighted-average reserve requirement ratio by 20 basis points in the third quarter of the year.

(Reporting by Kevin Yao and Joe Cash in Beijing, Shanghai newsroom, and Claire Fu in Singapore Editing by Shri Navaratnam)