China’s economy delivered an unexpected boost in the first quarter of 2025, with Q1 GDP growth hitting 5.4% year-on-year, surpassing analysts’ forecasts of 5.1%. This strong showing has given temporary relief to investors and policymakers alike, signaling that the world’s second-largest economy still holds resilience despite mounting global pressures. However, beneath the optimistic headline figures lie deep-rooted challenges — the most pressing of which is the escalating U.S.-China tariff war that threatens to dampen China’s export momentum and broader economic prospects.
In This Article:
A Strong Start to 2025
China’s economic growth for Q1 2025 matched the fourth quarter of 2024, reflecting a consistent upward trend driven by robust domestic consumption and revived industrial output. The March retail sales surged by 5.9% year-on-year, while factory output accelerated to 7.7%, both surpassing market expectations. These gains were largely supported by government stimulus packages and improved consumer sentiment, particularly in the electronics and furniture segments, which saw double-digit growth thanks to targeted consumer goods trading programs.
Investment also received a boost, albeit modest, as fiscal policies began to trickle down into real economic activities. But despite these positive signs, the recovery remains uneven, and the road ahead is far from smooth.
The Tariff Shock: A Game-Changer
Just as China was regaining economic momentum, a new storm brewed on the global front. The U.S., under the Trump administration, raised tariffs on Chinese imports to a staggering 145%, an aggressive move that reignited trade tensions. China swiftly responded with 125% retaliatory tariffs on American goods, escalating what many analysts now call the most severe trade confrontation in decades.
This sudden policy shift has prompted market analysts to slash China’s full-year 2025 GDP forecasts. A Reuters poll now predicts a subdued 4.5% growth rate for the year, down from the 5.0% achieved in 2024. UBS has taken a more bearish view, revising its 2025 forecast down to 3.4%, citing the sustained impact of tariffs and their ripple effects on China’s industrial and export sectors.
Export Front: A Temporary Boom Before the Bust?
Interestingly, China’s export figures for March showed a notable uptick. But experts warn this may be a short-lived surge, driven primarily by factories rushing to ship goods ahead of the new tariff deadlines. As these U.S. levies come into full effect, export numbers are expected to take a severe hit, affecting not only GDP figures but also employment and private sector investment.
Xu Tianchen, senior economist at the Economist Intelligence Unit, labeled the Q1 growth as “a very good start,” but cautioned that sustaining this momentum will require strong, timely policy responses. Given the external shocks and internal vulnerabilities, this will be easier said than done.
Property Woes and Unemployment: Internal Weaknesses Remain
While consumption and industry are showing strength, property investment remains a significant drag. In Q1, real estate investment fell by 9.9% year-on-year, deepening the sector’s ongoing slump. Moreover, new home prices were stagnant in March, indicating continued weakness in a market that once served as a major engine for China’s growth.
Additionally, rising unemployment and deflationary pressures suggest that consumer confidence is still fragile, especially in lower-tier cities and rural areas.
Policy Responses and Outlook
In response to the deteriorating outlook, Chinese policymakers have reiterated that they have ample fiscal and monetary tools to navigate this storm. Premier Li Qiang recently pledged new support measures, and the Politburo is expected to outline a more aggressive economic agenda later this month.
China’s central government has already increased its annual budget deficit and signaled more easing measures ahead. However, recent moves like Fitch’s downgrade of China’s sovereign rating over debt concerns highlight the delicate balancing act Beijing must perform — stimulating the economy without triggering long-term financial instability.
Growth Now, Uncertainty Ahead
The Q1 2025 figures show that China’s economy still has engines of growth, particularly through consumption and manufacturing. However, with the U.S.-China trade war intensifying, and internal economic challenges like the real estate slump and rising debt looming large, the path forward is riddled with uncertainty.
The coming months will test Beijing’s resolve and flexibility. Can China transform its economy to rely more on internal demand? Will stimulus be enough to offset tariff shocks? These are the defining questions that will shape not just China’s future, but the global economy as well.
By – Jyothi
