China’s economy showed significant signs of weakening in May, marked by a 0.6% drop in retail sales—the first decline in over three years—and a larger-than-expected contraction in urban fixed-asset investment.
While industrial output provided a lone bright spot with a 4.5% rise, persistent weak domestic demand and a squeeze on corporate margins are prompting calls for meaningful government stimulus to stabilize consumption. The national unemployment rate saw a slight dip to 5.1%.
China's economic performance took a notable hit in May, with key indicators revealing a weaker-than-expected landscape that is now intensifying pressure on Beijing to introduce significant stimulus measures. This downturn comes despite some temporary relief provided by a de-escalation in Middle East tensions.
Retail sales, a crucial barometer of consumer spending, experienced their first decline in over three years, shrinking by 0.6% from a year earlier, according to figures released by the National Bureau of Statistics on Tuesday. This unexpected contraction, which defied economists' expectations for flat growth, highlights the struggle of consumer spending, a sentiment not even fully buoyed by the Labor Day holiday and recent adjustments to trade-in subsidies. Despite the monthly drop, the bureau's spokesperson, Fu Linghui, noted an overall 2.8% jump in retail sales for goods and services combined over the first five months of the year.
Urban fixed-asset investment, which includes real estate and infrastructure projects, contracted by a sharper-than-anticipated 4.1% as of the end of May, worsening from a 1.6% drop recorded in the first four months. Real estate proved to be a significant drag, with inflows falling 16.2% in the January-to-May period. Manufacturing fixed-asset investment also contracted for the first time since December 2020, according to Wind data, even amidst some resilience in high-tech and policy-supported manufacturing sectors. Infrastructure investment, however, managed a modest 0.6% growth year-on-year.
Industrial output emerged as the lone bright spot, posting a 4.5% rise in May. This performance topped estimates of 4.3% growth and marked a rebound from April's near three-year low of 4.1%. The national unemployment rate also saw a slight improvement, dipping to 5.1% in May from 5.2% in April.
Acknowledging the economic challenges, the statistics bureau stated, "The domestic imbalance between strong supply and weak demand is acute." It further noted that "some enterprises are facing considerable pressure in their operations," advocating for new technology development and greater employment support to achieve "an appropriate increase in economic output."
These latest figures underscore a broader economic slowdown following a strong first quarter. April already saw a deceleration across various sectors, with industrial output and retail sales recording their weakest gains in years. In May, the official gauge of manufacturing activity also softened to 50, the threshold separating expansion from contraction. Consumer behavior during the extended holiday in early May further illustrated this trend, with per capita spending lagging behind the same period in 2025, as consumers exhibited increased price-consciousness.
Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, highlighted that the weak retail sales data places considerable pressure on the government to consider policy measures aimed at stabilizing consumption. He anticipates such "policy fine-tuning" to potentially emerge in July, following the release of second-quarter GDP data.
China's economy has increasingly adopted what economists term a "K-shaped" growth model, characterized by robust manufacturing and export sectors offsetting persistent weaknesses in the property market and consumer spending. Sheane Yue, senior economist at Oxford Economics, projects the economy to expand by 4.2% in the second quarter, a significant deceleration from the 5% growth observed in the first quarter.
On the geopolitical front, an agreement between President Donald Trump and Iran's lead negotiator to extend a tenuous ceasefire by another 60 days and reopen the Strait of Hormuz offered some relief, alleviating fears of a prolonged energy shock that had roiled global markets. However, economists caution that the path to a durable resolution remains uncertain, and the normalization of shipping through the Strait of Hormuz will take time.
Exports have remained a standout performer, achieving double-digit growth in both April and May. This was largely propelled by surging global demand for renewables and AI-related technologies, which effectively offset the negative impact from the Middle East conflict. While the conflict's disruption to energy flows pushed up commodity costs, helping ease long-standing deflationary pressures in China, these gains barely translated into consumer prices due to persistent weak domestic demand.
Producer inflation surged at its fastest pace in nearly four years in May, yet consumer inflation remained modest at 1.2%. This suggests that firms are largely absorbing higher costs amidst weak pricing power, rather than passing them on to consumers. According to Yue, this indicates a continued squeeze on corporate margins, not the broader reflation that policymakers are striving for.
