China’s economy demonstrated unexpected strength in early 2025 thanks to consumer subsidies and a surge in export shipments ahead of tariff increases. However, deteriorating relations with Donald Trump over the trade war are clouding the outlook and intensifying calls for stimulus measures.
Unexpectedly Strong First Quarter Figures
China’s gross domestic product grew 5.4% in the first quarter year-on-year, the government announced Wednesday, exceeding the forecast of 5.2%. Both production and consumption showed unexpected momentum in March, before massive US tariffs on Chinese goods took effect this month.
This favorable picture will provide little comfort to policymakers as economic activity is expected to deteriorate starting in April. Cargo data from last week already showed a slowdown in the volume of goods processed by Chinese ports, foreshadowing a decline in trade as global companies pause orders and reduce production.
Key indicators released Wednesday include:
- Industrial output increased by 7.7% in March year-on-year, the fastest growth since June 2021
- Retail sales rose by 5.9%, the best pace since December 2023 and much stronger than the 4.3% increase expected by economists
- Fixed asset investment grew by 4.2% in the first three months of 2025, while property investment contracted by 9.9%
- The urban unemployment rate was 5.2% in March, down from 5.4% in the previous month
Challenges and Uncertain Future
The improvement is “now in the past,” said Michelle Lam, economist for Greater China at Societe Generale SA. “Stimulus delivery remains very urgent. The situation can deteriorate quite rapidly, as shown by some high-frequency data on the impact of tariffs on US-bound shipments.”
As a sign of prevailing tariff concerns, Chinese stocks in Hong Kong deepened their losses to as much as 3.3%. The yuan remained stable at 7.3297 in the offshore market, while the yield on ten-year government bonds fell by 2 basis points to 1.63%.
Without additional stimulus, China may struggle to meet its official growth target of around 5% this year:
- Exports are expected to decline after contributing to a third of growth in 2024
- Business and consumer sentiment will likely suffer a blow from the trade war
- Economists at international banks including UBS Group AG, Goldman Sachs Group Inc., Citigroup Inc., and Societe Generale have lowered their growth forecasts for China in 2025 to approximately 4% or less in recent weeks
Expected Stimulus Measures
The performance of China’s economy this year will largely depend on how much stimulus Beijing implements and how quickly support measures are deployed. A key factor will be the sustainability of the recovery in consumer demand, which has been boosted by subsidies for purchasing cars, appliances, and smartphones.
Some economists expect the People’s Bank of China to cut interest rates or the amount of cash banks must hold in reserves as early as this month. Others predict several trillion yuan in additional fiscal borrowing and spending to fill the gap left by declining exports. The government could also provide targeted assistance to exporters by expediting tax refunds or offering cheaper loans.
A meeting of the Communist Party’s Politburo at the end of April will likely provide further clues to policymakers’ thinking regarding the timing and size of stimulus. With positive data, there is a risk that officials may decide to act only when growth hits a wall.
Persistent Problems
Despite the positive data released Wednesday, the economy continues to suffer from persistent deflation. The GDP deflator—a broad measure of prices across the economy—declined for the eighth consecutive quarter, the longest streak since quarterly data began in 1993.
Emphasizing the urgency to strengthen domestic demand, Premier Li Qiang visited a consumer goods exhibition in Beijing on Tuesday. He called on business representatives to be “united” in overcoming difficulties and actively diversify markets, including compensating for export losses with domestic sales.
“China can only rely on domestic consumption,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group. “The retail sales figures are encouraging. Whether this trend can be sustainable depends on how fast and large the stimulus package will be.”
