China’s economy exceeds expectations with 5.4% growth in first quarter

China’s economy surpassed expectations in the first quarter, driven by robust consumption and industrial production.

According to data released on Wednesday, China’s gross domestic product (GDP) grew by 5.4% year-on-year in the January-March quarter, exceeding the 5.1% increase expected by analysts polled by Reuters.

Xu Tianchen, a senior economist at the Economist Intelligence Unit, described the 5.4% growth rate as “a very good start,” noting that government stimulus had boosted consumption and supported investment.

“In each of the past two years, China’s first quarter has been high, and the second quarter has been low,” Xu said, adding that a “strong and timely policy response” was needed, given the additional pressure from US tariffs.

Exports helped support growth last year, even as a trillion-dollar trade surplus, a prolonged real estate sector slump, and sluggish domestic demand continued to undermine a solid recovery.

Chinese Premier Li Qiang said this week that the country’s exporters would have to cope with “profound” external changes and pledged to support greater domestic consumption.

According to Reuters, analysts are concerned that US tariffs could lead to a sharp decline in the momentum China has gained.

The economy is expected to grow at an annual rate as low as 4.5% in 2025, slowing from last year’s 5.0% pace and falling short of the official target of around 5.0%, according to a Reuters poll. Many analysts have sharply lowered their GDP forecasts for this year.

On Wednesday, ANZ lowered its China 2025 GDP forecast from 4.8% to 4.2% and its 2026 forecast from 4.5% to 4.3%, citing punitive US tariffs.

UBS painted an even more pessimistic picture this week, cutting its 2025 growth forecast for the Asian giant from 4% to 3.4%, assuming continued increases in China-US tariffs and additional stimulus from Beijing.

“We believe the tariff shock poses unprecedented challenges for China’s exports and will also lead to a major adjustment in the domestic economy,” UBS analysts said in a note.

While many other countries are covered by US tariffs, Trump has targeted China for the largest tariffs.

Last week, Trump’s move to raise tariffs on China by 145% led to Beijing raising tariffs on US goods by 125%.

Unemployment and deflation issues

The escalating trade war with the US overshadowed some of the brighter notes in separate data.

Retail sales, a key indicator of consumption, rose 5.9% year-on-year in March, after increasing 4.0% in January-February, while growth in factory output accelerated to 7.7% from 5.9% in the first two months. Both figures exceeded analysts’ forecasts.

The increase in retail sales was driven by sharp double-digit increases in sales of home electronics and furniture, aided by the government’s consumer goods trade-in program.

However, the decline in China’s real estate sector continued to be a drag on overall growth.

Real estate investment fell 9.9% year-on-year in the first three months, widening from a 9.8% drop in January-February. New home prices in March were unchanged from the previous month.

Data released on Wednesday indicated that the economic recovery is still uneven, particularly as high unemployment and persistent deflationary pressures raise concerns about weak demand.

“A 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 major concerns,” he added.

Broad policy measures required

Moreover, analysts believe that the increase in China’s exports in March—driven by factories rushing shipments to beat Trump’s latest tariffs—could sharply reverse in the coming months as heavy US tariffs take effect.

Analysts expect further support measures in the coming months, following monetary easing steps taken late last year.

Earlier this month, Fitch downgraded China’s credit rating, citing rapidly growing public debt and risks to public finances, signaling a difficult balancing act for policymakers seeking to expand consumption in the face of declining trade.

“The current situation is similar to the negative shocks China has experienced in the past, such as the COVID-19 pandemic in 2020 and the global financial crisis in 2008,” said Yeung from ANZ.

“We see limited options for Chinese authorities other than a major fiscal expansion to counter the tariff shock,” he assessed.