China’s economy expanded by 5.4% in Q1, but faces strong headwinds

May 07, 2025

China’s economy expanded by 5.4% in Q1, but faces strong headwinds

In Q1 2025, China's GDP grew by 5.4% year-on-year, unchanged from the previous quarter and in line with the official growth target of “around 5%”. The growth was mainly driven by retail sales and exports. Looking forward, however, the economy faces strong headwinds from uncertainties over US trade policy, persistent weakness in consumer confidence, and malaise in the property sector. The recent politburo meeting, concluded in late April, pledged a proactive fiscal policy and moderately loose monetary policy. This appears to signal the willingness of the government to provide additional support in response to changing circumstances. What, when, and how much remain unspecified. 

Trusted Insights for What’s Ahead^®

• Status of China’s Economy: China posted solid growth in Q1, but the US tariff shock looms large
  China’s economy showed better-than-expected in Q1 2025 thanks to the ongoing consumer goods trade-in program, which boosted retail sales. In parallel, exports surged ahead of higher tariffs. However, the impacts of the US-China trade war aren’t yet showing in the data; this is expected soon. External uncertainty will continue to cloud the growth outlook and prompt calls for additional government stimulus.
• Investment Trends: Manufacturing investment remains robust; property investment continues to contract
  Fixed asset investment (FAI) grew 4.2% y-o-y in Q1, up from 4.1% in the Jan-Feb period (“Jan-Feb”). Manufacturing investment remains robust (9.1% in Q1 vs. 9.0% in Jan-Feb), and infrastructure investment also increased (5.8% in Q1 vs. 5.6% in Jan-Feb). Conversely, property investment continues to contract (-9.9% in Q1 vs. -9.8% in Jan-Feb). Looking ahead, the expected acceleration in bond issuance in the coming months should continue to support infrastructure and manufacturing investment.
• Consumption Trends: Retail sales improve on the consumer trade-in program, but confidence remains very weak
  Retail sales posted 5.9 % y-o-y growth in March, up from 4.0% in Jan-Feb. The improvement was mainly driven by the ongoing consumer goods trade-in program. At the “Two Sessions”, the government announced that RMB 300 billion would be spent on expanding the consumer goods trade-in program this year, compared with RMB 150 billion allocated last year. In April’s Politburo meeting, the authorities reiterated the need to boost domestic demand, but concrete measures have yet to be announced.
• Trade Trends: Export growth accelerated in March; but tariff hikes cloud the 2025 outlook for trade
  Export growth surged to 12.4% y-o-y in March, up from 2.3% in Jan-Feb. This was driven by exporters front-loading shipments ahead of higher tariffs starting in April. The low base effect compared to March last year also reflected the export figures. The USChina trade war escalated significantly in April. This will substantially impact US-China bilateral trade. The broad-based tariffs imposed by the US on other countries, presumably targeting Chinese imports to those countries, also stand to bear significantdownward pressure on Chinese exports, if the countries impose them, that is. We are monitoring unfolding developments carefully