Goldman Sachs Adjusts China Outlook as Higher Energy Costs Weigh on 2026 GDP Projections

The Chinese economy demonstrated a robust start to 2026, as both industrial production and domestic consumption surpassed market expectations during the first two months of the year. Data released by the National Statistics Bureau on Monday indicated that retail sales grew by 2.8% year-over-year, exceeding the 2.5% expansion predicted by economists. While this figure represents a deceleration from the 4% growth recorded during the same period in 2025, the momentum was significantly bolstered by Lunar New Year festivities. According to Yuhan Zhang of The Conference Board’s China center, holiday spending drove notable gains in high-end categories such as jewelry, gold, tobacco, and alcohol, alongside increased activity in hotel bookings and duty-free shopping. This steady consumption has, for the time being, reduced the immediate pressure on Beijing to implement large-scale stimulus measures.

Industrial output emerged as a primary driver of economic strength, climbing 6.3% and comfortably beating the 5% jump estimated by a Reuters poll. This industrial resilience is largely attributed to vigorous foreign demand from Southeast Asian and European partners, which propelled outbound shipments to surge nearly 22% in January and February. This export momentum persists despite international criticism regarding China’s industrial overcapacity. Meanwhile, fixed-asset investment rose by 1.8%, defying forecasts of a 2.1% contraction. However, the property sector remains a significant drag on the broader economy; real estate development investment fell by 11.1% in the first two months of the year. While this is an improvement over the 17.2% decline seen in 2025, home prices across 70 major cities plummeted 3.2% in February—the sharpest drop in eight months. Excluding real estate, investment actually grew by 5.2%, supported by healthy capital inflows into manufacturing and infrastructure.

Despite these positive indicators, Chinese officials and global analysts remain wary of intensifying headwinds. The Statistics Bureau highlighted rising geopolitical risks and structural issues within the domestic growth model that continue to impact corporate margins. A specific point of concern is the volatility in global oil prices exacerbated by Middle Eastern tensions. Spokesperson Fu Linghui emphasized that while China’s energy supply remains sufficient, Beijing is closely monitoring inflationary impacts. Experts suggest China may be better positioned than other major economies to handle potential disruptions, such as a closure of the Strait of Hormuz. Strategic diversification has left China with approximately 1.2 billion barrels of onshore crude reserves—enough for three to four months of demand—while seaborne imports through Hormuz now represent less than half of total shipments and only 6.6% of total energy consumption.

Nevertheless, a prolonged crisis in the Middle East could still induce a demand shock. Higher energy costs threaten to disrupt global supply chains and dampen the purchasing power of China’s key trading partners. Consequently, Goldman Sachs recently adjusted its real GDP growth forecast for China downward by 0.1 percentage point, while raising its annual consumer inflation outlook to 0.9% and predicting a 0.8% rebound in factory-gate prices. These adjustments come shortly after Chinese leadership set a relatively conservative GDP growth target of 4.5% to 5% for 2026, marking the least ambitious economic goal for the nation since the early 1990s as it navigates a complex transition away from its traditional property-led growth drivers.