China's economy improves as it braces for external shock

China’s economy got off to a strong start in the first three months of 2025, even as the world grappled with the turmoil caused by the Trump administration’s attempts to recalibrate global trade. GDP growth was up 5.4 percent in Q1, setting a good opening pace to achieve the annual growth target of around 5 percent. However, tensions with the United States are likely to leave more visible marks on the economy before long.

Strong GDP growth at the start of this year was partly due to Beijing’s stimulus measures in the final quarter of 2024, introduced to counter the double weaknesses of the real estate sector and still-sluggish consumption. The Q1 data also benefited from front loading of orders as buyers scrambled to avoid the impact of the threatened trade war, a trend visible in strong industrial production and exports. 

But relatively strong GDP growth cannot overshadow the persistent challenges facing China’s economy. The real estate sector has yet to stabilize and continues to weigh down growth and sentiment. High youth unemployment, deflation, and plummeting private sector profits are reminders that not all is well. Even without the trade war bringing external disruptions, China’s leadership would already be facing significant hurdles to ensure stable economic development.

Another key challenge is weak consumption. Additional support to stimulate consumption was announced at the National People's Congress in March, to avoid further problems in a worsening external environment. The leadership is taking a noticeably more serious approach to boosting consumption, introducing measures such as childcare subsidies, expanded trade-in programs, and limits on excessive overtime. Restoring household confidence and encouraging spending on goods and services will be key to offset any weakening of external demand.

Despite heated rhetoric between Washington and Beijing in recent weeks, any concrete actions and their economic impact have so far been limited. Beijing is holding back from premature large-scale stimulus, waiting for measurable signs of economic fallout. The leadership remains far from panic mode, instead signaling its readiness to ramp up support if needed.

China has used the past five years to prepare for worst case scenarios in its relationship with the United States. Better economic security and greater resilience were high on the policy agenda. While the leadership certainly did not wish for such a scenario, China is ready to take up the fight and unlikely to back down. More economic headwinds are likely in the coming months, but China’s leadership seems prepared to weather a storm.

Macroeconomics: GDP growth shows strength as the trade war escalates

• Amid growing trade war tensions and ever greater uncertainty about prospects for the global economy, China’s GDP grew by 5.4 percent in Q1, matching the previous quarter but beating market expectations of 5.1 percent. Growth is expected to slow in the coming quarters due to fallout from the trade war with the United States, but China’s strong performance in Q1 provides a solid foundation.
• Strong industrial activity continues to be a major factor driving GDP growth. The manufacturing share of GDP increased by 6.8 percent, the highest pace since Q2 2021. This contrasted with a slowdown to 5.3 percent in the services sector, down from 5.8 percent in the previous quarter. A key reason for the slowdown in services was a sharp downturn in financial services, which slowed from 6.5 percent in Q4 2024 just 3.8 percent.
• Despite strong Q1 growth, some signs of weakness persist. Quarter-on-quarter growth slowed to 1.2 percent (see Exhibit 2). The discrepancy with year on year growth suggests that underlying growth momentum may be easing.