China’s economy slows in April as output, retail sales sharply undershoot forecasts

[BEIJING] China’s growth lost momentum in April, with industrial output and retail sales both sharply undershooting expectations as the world’s second-biggest economy wrestled with higher energy costs from the Iran war and persistently weak domestic demand.

Better-than-expected exports and China’s domestic fuel-pricing controls have helped weather the energy shock, but higher input costs threaten to squeeze already weak factory margins and further dampen consumer spending if the conflict drags on.

Factory output grew 4.1 per cent in April from 2025, compared with a 5.7 per cent rise in March, data from the National Bureau of Statistics (NBS) showed on Monday (May 18), missing a Reuters poll forecast for 5.9 per cent growth. It marked the slowest growth since July 2023.

“The strong performance of the exporters helped to mitigate the weaknesses in domestic demand, but not enough to fully offset it,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management.

Exports gathered pace in April as factories raced to meet a wave of orders from AI-related industries and other buyers seeking to stockpile components amid fears the Iran war could push global input costs even higher.

Zhang did not expect the government to change its policy stance on just one month of weak data and said Beijing will likely reassess its policy stance in July when the second-quarter GDP data is available.

Retail sales, a gauge of consumption, rose just 0.2 per cent in April, cooling sharply from 1.7 per cent in March and marking the weakest gain since December 2022. The figures were also well below forecast centred on a 2 per cent increase.

Household consumption has remained fragile. Domestic car sales dropped 21.6 per cent in April from 2025, marking the seventh straight month of decline, even as automakers ramped up efforts to expand in overseas market to offset weakness at home.

“Retail sales growth in the first four months of 2026 points to still-weak household demand, with consumers concentrating spending on selective discretionary and upgrade categories rather than broad-based consumption,” said Zhang Yuhan, principal economist at the Conference Board’s China Center.

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He said the split highlights a two-speed recovery: steady spending on small lifestyle and tech upgrades, but weak appetite for big-ticket, credit-driven purchases tied to housing and income.

Adding to the gloom, fixed-asset investment contracted 1.6 per cent in the first four months of 2026, compared with a 1.7 per cent rise in the January-to-March period.

Economists pointed to a drop in the official construction purchasing managers’ index, and heavy rainfalls in parts of southern China as some of the factors dragging on investment growth.

Few surprises from Trump visit

The April figures offered early signs that China’s first-quarter momentum was already fading and came after US President Donald Trump finished his state visit to China on May 15.

The summit delivered few surprises but eased tense relations between the world’s two biggest economies. China and the US have agreed to expand agricultural trade through tariff reductions and tackle non-tariff barriers and market access issues, but substantive progress across trade and investment remained elusive.

The economy expanded 5 per cent in the first three months of 2026, at the upper end of Beijing’s full-year target range of 4.5 to 5 per cent. But analysts have warned that the recovery is running on uneven ground as industrial output continues to outstrip domestic demand.

While a protracted downturn in the property market remains a drag on growth, the Middle East conflict has exposed the economy to external risks at a time of fragile consumption at home.

China’s property investment contraction widened in April year on year.

Better-than-expected exports and China’s domestic fuel-pricing controls have helped weather the energy shock, but higher input costs could squeeze manufacturers’ margins and further hurt household spending if the conflict drags on.

Top Chinese leaders have pledged to strengthen the country’s energy security, accelerate technological self-sufficiency and seek greater control of supply chains in response to external shocks.

The Politburo also reiterated China’s “proactive” fiscal stance and “appropriately loose” monetary policy, language broadly in line with previous meetings and suggesting no imminent additional stimulus plans. REUTERS