China growth tops forecasts but US tariff shock looms large

BEIJING — China's first-quarter economic growth outstripped expectations, underpinned by solid consumption and industrial output, but analysts fear momentum could shift sharply lower as US tariffs pose the biggest risk to the Asian powerhouse in decades.

President Donald Trump has ratcheted up tariffs on Chinese goods to eye-watering levels, prompting Beijing to slap retaliatory duties on US imports that have raised the stakes for the world's two biggest economies and rattled financial markets.

Data on Wednesday showed China's gross domestic product (GDP) grew 5.4 percent in the January-March quarter from a year earlier, unchanged from the fourth quarter, but beat analysts' expectations in a Reuters poll for a rise of 5.1 percent.

Growth momentum is expected to cool sharply in the next few quarters, however, as Washington's tariff shock hits the crucial export engine, heaping pressure on Chinese leaders to roll out more support measures to keep the world's second-largest economy on an even keel.

Government stimulus boosted consumption and supported investment, said Xu Tianchen, senior economist at the Economist Intelligence Unit, calling the 5.4-percent pace "a very good start."

"In each of the past two years, China had a high-flying first quarter and an underwhelming second quarter," Xu said, adding that "a forceful and timely policy response" is needed given the additional pressure stemming from US tariffs.

Exports have remained a lone bright spot in China's economy, with a trillion-dollar trade surplus last year helping to underpin growth even as a prolonged property sector slump and sluggish domestic demand continue to undercut a solid recovery.

That complicates the policy challenge for Beijing as Trump's relentless focus on China's vast trade engine chokes off a key growth driver.

China's Premier Li Qiang said this week the country's exporters would have to cope with "profound" external changes, and vowed to support more domestic consumption.

Investors in China looked past the better-than-expected data, pushing the benchmark Shanghai Composite Index down nearly 1.0 percent and denting the yuan, as confidence remained frail amid a darkening growth outlook.

'Unprecedented' challenge

Indeed, quarter-on-quarter momentum highlighted a softer underbelly, with the economy expanding 1.2 percent in the first quarter, slowing from 1.6 percent in October-December.

For 2025, the economy is expected to grow at a subdued 4.5 percent pace year on year, the Reuters poll showed, slowing from last year's 5.0 percent and falling short of the official target of around 5.0 percent. Many analysts have sharply slashed their GDP forecasts for this year.

Citing the punitive US duties, ANZ on Wednesday cut its China 2025 GDP forecast to 4.2 percent from 4.8 percent and to 4.3 percent from 4.5 percent for 2026.

UBS was even more pessimistic, having this week downgraded its 2025 growth forecast for the Asian giant to 3.4 percent from 4 percent, on the assumption that Sino-US tariff hikes remain in place and that Beijing will roll out additional stimulus.

"We think the tariff shock poses unprecedented challenges to China's exports and will set forth major adjustment in the domestic economy as well," analysts at UBS said in a note.

While several other countries have been swept up in US tariffs, Trump has targeted China for the biggest levies.

Last week, Trump lifted duties on China to 145 percent, prompting Beijing to jack up levies on US goods to 125 percent and dismissing US trade actions as "a joke."

Unemployment, deflation woes

The spiralling trade war with the United States took some of the shine off brighter notes in separate data.

Retail sales, a key gauge of consumption, rose 5.9 percent year on year in March after gaining 4.0 percent in January-February, while factory output growth quickened to 7.7 percent from 5.9 percent in the first two months. Both numbers topped analysts' forecasts.

The retail sales uptick was driven by sharp double-digit gains in home electronics and furniture sales, helped by the government's consumer goods trade-in scheme.

But China's property downturn remained a drag on overall growth.

Property investment fell 9.9 percent year on year in the first three months, extending the 9.8 percent drop in January-February. March new home prices were unchanged on month.

The broader impulse from Wednesday's data still pointed to an uneven economic recovery, particularly as elevated unemployment and persistent deflationary pressures heighten concerns over weak demand.

"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."

Moreover, analysts say a surge in China's March exports — driven by factories rushing shipments to beat the latest Trump tariffs — will reverse sharply in the months ahead as the hefty US levies take effect.

Ample room for stimulus

Policymakers have repeatedly said the country has ample room and tools to bolster the economy, and analysts expect further support measures in coming months following a blitz of monetary easing steps late last year.

Earlier this month, Fitch downgraded China's sovereign credit rating, citing rapidly rising government debt and risks to public finances, suggesting a tricky balancing act for policymakers seeking to expand consumption to guard against a trade downturn.

"The current situation is similar to the negative shocks China experienced in the past, such as the Covid-19 outbreak in 2020 and the global financial crisis in 2008," ANZ's Yeung said. "We see limited options for Chinese authorities against the tariff shock except a large fiscal expansion."