China’s Economic Growth Slows Amid Weak Demand, Tariff Pressure

 

China’s economy expanded 5.2% year-on-year in the second quarter of 2025, slightly ahead of expectations but down from 5.4% in Q1. Despite aggressive policy support, including interest rate cuts and infrastructure spending, domestic demand remains weak. While the GDP numbers suggest resilience, economists warn that much of the strength was due to front-loaded exports ahead of renewed U.S. tariffs.

Consumer confidence continues to sag. Many households, like that of 30-year-old doctor Mallory Jiang in Shenzhen, are scaling back on spending due to pay cuts and high living costs. GDP growth on a quarterly basis was 1.1%, slightly below the 1.2% growth in Q1 but above expectations.

Retail sales a key measure of consumer activity slowed sharply to 4.8% in June from 6.4% in May. This signals fading momentum in consumption despite government subsidies. While industrial output grew 6.8%, boosted by short-term export gains, deflationary pressure is still strong. Producer prices fell at their fastest pace in nearly two years, underlining sluggish demand.

Analysts believe further stimulus will be required, but also caution that fiscal tools alone may not be sufficient. Beijing's upcoming Politburo meeting in late July will likely guide economic policy for the rest of the year. However, with deflation risks rising and property markets still weak, maintaining the 5% annual growth target appears increasingly difficult.

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Despite a temporary export boost in June, the outlook for the second half of 2025 appears bleak. The effects of the U.S.-China tariff truce are fading, and investors expect export growth to weaken further. U.S. President Donald Trump’s tariff agenda continues to add external pressure, especially with a looming deadline in August.

The domestic real estate sector remains a major drag. Investment in property fell significantly in the first half of the year, and new home prices in June dropped at their fastest monthly pace in eight months. Despite repeated support measures, confidence in the housing market has not recovered. Fixed-asset investment, another key economic driver, rose just 2.8% a sharp slowdown from earlier in the year.

Steel production also declined, with output falling 9.2% in June as demand faltered and factories paused for maintenance. This highlights broader industrial softness that may persist into Q3. Analysts at Eurasia Group warn that Q3 growth is at risk without stronger fiscal intervention, while others expect more aggressive deficit spending if conditions deteriorate.

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Meanwhile, global trade tensions and the fragile domestic recovery are forcing businesses and consumers alike to remain cautious. Many exporters are now shifting focus to overseas markets to hedge against domestic uncertainties.

Although ANZ raised its full-year GDP forecast slightly to 5.1%, the consensus outlook is less optimistic. A Reuters poll projects growth to slow to 4.5% in Q3 and just 4.0% in Q4, with longer-term forecasts dipping to 4.2% by 2026. Without meaningful structural reforms or a decisive rebound in consumer spending, China’s ability to sustain robust growth in the face of mounting headwinds is in serious doubt.