China Q1 GDP growth beats expectations, but US tariff shock looms large

Highlights:

• China's Q1 GDP grows 5.4% vs Q4's 5.4%, above the 5.1% forecast
• March data show solid retail sales and industrial output data
• Policymakers expected to ramp up stimulus as tariffs bite
• Tariffs prompt analysts to slash 2025 GDP growth forecasts

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% 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%.

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% 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 will have to cope with "profound" external changes, and vowed to support more domestic consumption.

"UNPRECEDENTED" CHALLENGE

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

For 2025, the economy is expected to grow at a subdued 4.5% pace year-on-year, the Reuters poll showed, slowing from last year's 5.0% pace and falling short of the official target of around 5.0%. 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% from 4.8% and to 4.3% from 4.5% for 2026.

UBS was even more pessimistic, having this week downgraded its 2025 growth forecast for the Asian giant to 3.4% from 4%, on the assumption that Sino-US tariff hikes will 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%, prompting Beijing to jack up levies on US goods to 125% 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% year-on-year in March after gaining 4.0% in January-February, while factory output growth quickened to 7.7% from 5.9% 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% year-on-year in the first three months, extending the 9.8% 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."