Why China’s strong Q1 growth won’t last

Despite China’s solid first-quarter growth, the United States’ tariff policy has already impacted second quarter activity.

China’s current economy is showing patterns similar to those that followed negative shocks in the past, such as the COVID-19 outbreak in 2020 and the Global Financial Crisis in 2008.

As a result, ANZ Research has revised its forecasts of China’s gross domestic product for 2025 to 4.2 per cent, down from 4.8 per cent, and for 2026 to 4.3 per cent, down from 4.5 per cent.

Even though China’s first-quarter GDP growth came in at 5.4 per cent, ANZ Research expects year-on-year growth to drop by 0.9 percentage points to 4.5 per cent in the second quarter and to 3.5 per cent in the second half of the year.

For 2025, export growth will likely fall by a third for the whole year, which translates to a 2.1 percentage point drag from ANZ Research’s baseline forecast, offset by anticipated policy stimulus support of 0.5 per cent. Growth in 2026 is likely to also be lacklustre, following a similar trajectory to what followed the GFC.

Unpredictable

The updated forecast stems not from the tariffs themselves but from the unpredictable nature of the announcements and commencements. The back-and-forth nature of US President Donald Trump’s decisions has eroded global business sentiment.

Direct shipments of goods to the US represented only 14.6 per cent of China’s total exports in 2024, so an escalation of the reciprocal tariff rate from 34 per cent to more than 100 per cent will have only a marginal impact on China’s overall export figures.

Other countries are also affected by the tariffs, and uncertainty over the possible outcomes is negatively affecting supply-chain rearrangements during the 90-day grace period.

China’s property market remains the elephant in the room. Recent data indicate the weakness in China’s property market continues. Positive momentum achieved in the first quarter of 2025 has been wiped out by the US tariff announcements.

Residential property sales dropped by 0.4 per cent, year-on-year, in the first quarter, with new home prices down by 5 per cent. Chances of the property sector finding a floor and rising off it are dim. March retail sales grew 5.9 per cent, year-on-year, in nominal terms. China’s consumption will see a sustainable recovery only if there is a pick-up in real estate.

Pressure

Strong GDP growth does not represent overall economic health. Deflation and youth unemployment remain primary concerns. Deflationary pressure will likely rise again, with a deeper negative output gap going forward. Overcapacity and tariff pressure are likely to push producer price inflation further into negative territory.

China’s youth unemployment rate is likely to rise in June due to the potential loss of employment in the manufacturing sector coinciding with more than 12 million fresh graduates entering the job market.

April’s Politburo meeting could be disappointing. There have been no indications of a strong policy response after the US tariff announcements. Other than a large fiscal expansion, which is yet to come, the authorities have limited options for mitigating the shock.

ANZ Research’s calculation shows first-quarter construction GDP may be around -3 per cent, year-on-year, suggesting the fiscal firepower is well preserved for the rest of 2025.

The Politburo may focus on targeted measures, given the good first-quarter GDP. ANZ Research has pencilled a 50-basis-point cut to China’s interest rate. However, the People’s Bank of China has stated the time of a rate cut may be after the fiscal policy announcement — but that could turn out to be too late.

Raymond Yeung is Chief Economist Greater China, Zhaopeng Xing is Senior China Strategist, and Vicky Xiao Zhou is an Economist at ANZ

This is an edited version of the ANZ Research report “China: GDP downgrade despite solid Q1”, published April 16, 2025