The global macroeconomic backdrop has once again shifted into a phase of heightened uncertainty, as the outbreak of war in the Middle East at the end of February 2026 introduces a new layer of risk to an already uneven recovery. According to the IMF, the global economy had, until recently, shown a degree of resilience, with supportive factors such as technology-driven investment, relatively accommodative financial conditions, and policy support helping offset the drag from trade frictions and elevated uncertainty. However, the conflict now acts as a significant counterweight, primarily through its impact on commodity markets, inflation expectations, and financial conditions. Under its “reference forecast,” which assumes that the conflict remains contained in both duration and scope, the IMF projects global growth at 3.1 percent in 2026 and 3.2 percent in 2027. This represents a moderation from the 3.4 percent growth observed during 2024-2025 and remains well below the pre-pandemic average of 3.7 percent. Notably, the 2026 projection has been revised downward by 0.2 percentage points compared to earlier estimates, reflecting the direct and indirect consequences of the conflict. Inflation, meanwhile, is expected to rise to 4.4 percent in 2026 before easing to 3.7 percent in 2027, suggesting that price pressures linked to energy and supply disruptions will persist in the near term. The broader implication is that, absent the conflict, global growth would likely have been stronger, with pre-war projections indicating a potential upward revision. Instead, downside risks now dominate the outlook. More adverse scenarios – such as a prolonged conflict or further damage to energy infrastructure – could see global growth slow to between 2.5 percent and 2.0 percent, accompanied by significantly higher inflation. Importantly, the burden of this adjustment is not evenly distributed. Emerging market and developing economies, particularly commodity importers with existing structural vulnerabilities, are expected to face disproportionately larger setbacks.
Against this fragile global backdrop, China’s economic performance in the first quarter offers a more nuanced picture, combining resilience in headline growth with persistent structural imbalances. The economy expanded by 5.0 percent year-on-year, exceeding market expectations and marking an acceleration from the previous quarter. On a quarter-on-quarter basis, growth stood at 1.3 percent, indicating a steady, if not robust, recovery trajectory. This performance suggests that, at least in the near term, the direct impact of the Middle East conflict on China’s economy has remained contained. The composition of growth, however, reveals a more complex dynamic. Industrial production emerged as a key driver, with output increasing by 6.1 percent year-on-year, supported in particular by strong gains in equipment manufacturing and high-tech industries, which expanded by 8.9 percent and 12.5 percent respectively. Sectors linked to advanced manufacturing recorded exceptionally strong growth, underscoring Beijing’s continued focus on developing “new quality productive forces.” At the same time, the recovery remains uneven across sectors. While the service sector expanded by 5.2 percent, supported by robust activity in technologyrelated and business services, domestic consumption continues to lag. Retail sales growth reached only 2.4 percent year-on-year in the first quarter, with March figures coming in below expectations, highlighting still-fragile consumer confidence. The divergence between strong industrial output and weaker consumption reinforces the structural imbalance between supply and demand that continues to characterize the Chinese economy. Investment trends further underline this imbalance. Fixed asset investment grew modestly by 1.7 percent year-on-year, with infrastructure investment providing a key source of support, rising by 8.9 percent. Manufacturing investment also showed resilience, while investment in high-tech sectors continued to expand at a solid pace. In contrast, the real estate sector remains a significant drag, with investment declining by 11.2 percent and property sales continuing to contract. The persistent weakness in housing not only weighs on construction activity but also dampens broader domestic demand, given its central role in household wealth and consumption.
Overall, while China’s first-quarter performance demonstrates resilience and the effectiveness of targeted policy support, it also highlights the economy’s increasing reliance on external demand and industrial activity to sustain growth. The underlying imbalance between robust supply and relatively weak domestic demand remains unresolved, suggesting that the current growth trajectory may face challenges in the quarters ahead. This reliance on external demand is further evident in China’s trade performance, which continues to play a critical role in supporting overall economic activity. However, recent data points to a shift in dynamics. Export growth slowed markedly in March, rising by just 2.5 percent year-onyear, a significant deceleration from the strong performance observed earlier in the year. This moderation reflects the impact of weaker global demand, partly linked to the uncertainty generated by the Middle East conflict. In contrast, imports surged by 27.8 percent year-on-year, marking the strongest growth in over four years. This sharp increase was driven in part by higher prices for technologyrelated imports, as well as continued demand for key inputs. As a result, China’s trade surplus narrowed, declining by 3 percent yearon-year to USD 264.3 billion in the first quarter.
Despite these shifts, China’s trade structure continues to evolve. Exports of high-tech products remain a key area of strength, with strong growth in sectors such as semiconductors, electric vehicles, and shipbuilding. At the same time, trade with key partners across Asia and Europe remains resilient, even as exports to the United States continue to decline. This diversification provides a degree of insulation, although the broader export outlook remains sensitive to global demand conditions. The interplay between strong imports and moderating exports also reflects the broader macroeconomic environment. Rising commodity and energy prices have increased input costs, while China’s ability to pass these costs on to external markets remains limited, contributing to the narrowing trade surplus. In this context, while external trade continues to support growth, its role is becoming more complex and potentially less reliable as a driver of expansion.
Developments in the energy market add another critical dimension to the global outlook. The reopening of the Strait of Hormuz, following a temporary ceasefire, has led to a sharp correction in oil prices, with benchmarks declining by more than 10 percent. This reflects a rapid shift in market expectations, as fears of prolonged supply disruptions give way to a more optimistic assessment of near-term stability in one of the world’s most critical energy corridors. The reopening of the strait has immediate implications for both inflation and trade flows. Lower oil prices help ease cost pressures for energy-importing economies, including China, potentially providing some relief to industrial margins and consumer prices. At the same time, the normalization of shipping routes reduces logistical uncertainty, supporting global trade flows and alleviating some of the pressures that had built up during the height of the conflict. However, the situation remains inherently fragile. The reopening is tied to a temporary ceasefire, and the risk of renewed disruptions cannot be discounted.
Taken together, the interplay between a more uncertain global macro environment, a resilient yet imbalanced Chinese economy, and volatile energy markets underscores the delicate balance currently defining the global outlook. While supportive factors remain in place, the increasing prominence of downside risks suggests that this equilibrium will now have to prove its resilience under real market conditions.
Data source: Doric