Tariff Aftermath: China Clocks Strong GDP In Q1, But Economy's Outlook Remains Clouded In Trade Uncertainty

Strong domestic consumption and industrial output provided a lift, but analysts caution that this momentum may not last as escalating US tariffs cloud the country’s near-term economic trajectory.

While headline figures painted a promising picture, other economic indicators revealed lingering vulnerabilities.

Source : Freepik

China's economy began 2025 on a solid footing, outperforming expectations with a 5.4 per cent growth in the first quarter compared to the same period last year.

Strong domestic consumption and industrial output provided a lift, but analysts caution that this momentum may not last as escalating US tariffs cloud the country’s near-term economic trajectory.

The January-March growth figure, which remained steady compared to the previous quarter, exceeded the 5.1 per cent rise predicted in a Reuters poll. However, the quarter-on-quarter increase slowed to 1.2 per cent, down from 1.6 per cent in the final months of 2024—an early indication of growing pressure beneath the surface, the news agency reported.

Tariff Escalation Raises Stakes

The biggest challenge ahead comes from Washington’s increasingly aggressive trade stance.  President Donald Trump has sharply raised tariffs on Chinese goods, with duties now reaching as high as 145 per cent. In response, Beijing has imposed retaliatory tariffs on US imports, some as high as 125 per cent. These measures have reignited fears of a prolonged trade conflict that could derail China’s export-driven recovery, the report noted.

"The tariff shock poses unprecedented challenges to China's exports and will set forth major adjustment in the domestic economy as well," UBS analysts said in a note, after cutting their 2025 growth forecast for China from 4 per cent to 3.4 per cent. ANZ also revised its projections, lowering China’s 2025 GDP estimate to 4.2 per cent and trimming its 2026 forecast to 4.3 per cent.

Xu Tianchen, senior economist at the Economist Intelligence Unit, called the 5.4 per cent expansion “a very good start.” But he warned, “In each of the past two years China had a high-flying first quarter and an underwhelming second quarter,” noting that “a forceful and timely policy response” will be essential to offset tariff-related shocks.

Uneven Recovery Beneath the Surface

While headline figures painted a promising picture, other economic indicators revealed lingering vulnerabilities. Retail sales surged 5.9 per cent year-on-year in March, compared to a 4.0 per cent gain in the first two months, while factory output jumped to 7.7 per cent from 5.9 per cent—both surpassing forecasts. Gains in home electronics and furniture sales, aided by a trade-in initiative, contributed to the rise in consumption.

Yet, the property sector remained a persistent drag. Investment in real estate dropped 9.9 per cent in the first quarter, extending a similar decline seen earlier in the year. Home prices in March were flat, underscoring the fragility of the sector.

"Good GDP does not represent the overall economic health of an economy," said Raymond Yeung, chief China economist at ANZ. "Deflation and youth unemployment remain the primary concerns," the expert added.

Exports provided temporary relief, but analysts believed a March surge was likely due to companies racing to beat the latest round of tariffs. As these duties take full effect, export performance may weaken in the coming months.

Policymakers Face Limited Options

Despite the external pressure, Chinese officials have signalled they have room to manoeuvre. Premier Li Qiang acknowledged the need to adapt to “profound” global changes and reaffirmed support for domestic demand.

Still, Fitch’s recent downgrade of China’s sovereign credit rating—citing ballooning debt and fiscal risks—added complexity to any plans for large-scale stimulus. "We see limited options for Chinese authorities against the tariff shock except a large fiscal expansion," ANZ’s Yeung added.