China’s retail sales fall in May amid weak domestic demand, first decline in over 3 years

[BEIJING] China’s economy showed increasing unevenness in May, with retail sales falling for the first time in over three years while industrial output picked up pace.

Tuesday’s data highlight a two-speed growth pattern in China’s economy, with the export sector showing stellar performance but domestic demand worsening amid a multi-year property downturn.

Retail sales, a key gauge of consumption, slid 0.6 per cent in May, reversing April’s 0.2 per cent rise and below the estimated 0.0 per cent. It was the first monthly fall since December 2022.

Even the five-day Labour Day holiday failed to lift consumer activities, with the impact of the government’s consumer-goods trade-in scheme fading gradually. A high base from May 2025 also contributed to the decline.

“The weak retail sales data puts pressure on the government to consider policy measures to stabilise consumption. I still expect policy ‘fine tuning’ will come in July after second quarter GDP data is released,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

By contrast, industrial output rose 4.5 per cent in May from a year earlier, picking up from the 4.1 per cent growth recorded in April, data from the National Bureau of Statistics (NBS) showed on Tuesday (Jun 16). The reading beat expectations of a 4.3 per cent increase in a Reuters poll.

A surge in global AI investment has helped the world’s biggest manufacturer offset the export hit many had expected from the Middle East turmoil, but a 19.4 per cent export gain has yet to filter through to domestic consumption.

The fragility was evident in the auto sector. A downturn in domestic car sales extended into an eighth consecutive month in May, underscoring softening demand in the world’s largest auto market, where pressure is likely to persist through the rest of the year.

“Several divides characterised the economy in May: the divide between domestic and external demand, the divide between AI and the traditional industries, and the divide between goods retail and services consumption,” said Xu Tianchen, senior economist at the Economist Intelligence Unit.

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Xu expected economic growth in the second quarter to slow to 4.5 per cent from 5 per cent in the first.

“For full-year 2026, achieving the growth target of 4.5-5 per cent won’t be difficult, but soft domestic demand still warrants policy intervention in the second half.”

Investment slump deepens, property drag persists

Investment data was also much weaker than expected. Fixed-asset investment fell 4.1 per cent in the first five months of 2026, following a 1.6 per cent decline in January-April. Economists had expected a 2 per cent fall.

NBS spokesperson Fu Linghui said the decline was due in part to high temperatures and heavy rain in some regions as well as the transition from old to new growth drivers.

China still has ample room for investment in future, with new urbanisation, rural revitalisation, the development of “new quality productive forces” and improvements in public services all requiring support, Fu added.

Price data also pointed to imbalances in the growth. The widening gap between factory-gate inflation, which rose to its highest level since July 2022, and stagnant consumer inflation suggests demand has yet to keep pace with supply-side growth.

Property investment extended its decline in the first five months, dropping 16.2 per cent compared with the same period in 2025 after falling 13.7 per cent in January-to-April period. Property sales and new construction also fell more sharply.

On a month-on-month basis, new home prices fell at a slightly faster pace in May, even as larger cities showed tentative signs of stabilisation.

Weak household loan data released in the week ended Jun 14 suggested that people remain wary of borrowing to buy houses amid sluggish income growth and job insecurity.

The labour market is still under pressure with about 12.7 million graduates leaving schools during the summer, while fears of AI displacement are causing worker anxiety. But the nation-wide survey-based jobless rate eased to 5.1 per cent from April’s 5.2 per cent. REUTERS