China’s Q2 economic growth cools to 3.5-year low, missing market forecast
GDP growth from April to June eased to 4.3%, from 5% in Q1
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[BEIJING/ SINGAPORE] China’s economy expanded at its slowest pace in over three years in the second quarter, with weak household consumption clouding strong manufacturing and exports and intensifying concerns over the long-term sustainability of its unbalanced growth model.
At 4.3 per cent, gross domestic product growth in April to June eased from the first quarter’s 5 per cent, landing below the lower end of China’s 4.5 to 5 per cent full-year target and missing forecasts.
The data adds pressure on Beijing for more stimulus. But many analysts say a closely watched end-July meeting of the Communist Party’s Politburo, a top decision-making body, may not flag major steps due to concerns over ballooning debt.
Economists argue that the bigger challenge is not the pace of growth but its composition.
Wednesday’s data showed retail sales rising 1 per cent in June and industrial output expanding 5.3 per cent – suggesting an overwhelming reliance on global demand for manufactured goods at a time when trading partners are complaining about China’s imbalances and the Iran war weighs on the world economy.
Jane Hou, who runs a European goods importing business in eastern China, says her income has roughly halved since the beginning of 2026 as her firm’s sales have dropped.
An apartment she rents out has been without a tenant for more than six months – a reflection of China’s huge housing oversupply and a prolonged property crisis.
“Apart from necessary spending on food, I save on anything I can,” said Hou. “I haven’t bought a single piece of clothing in six months.”
Still, the economy grew 4.7 per cent from January to June, within target, reducing urgency for major stimulus.
Zhang Zhiwei, chief economist at Pinpoint Asset Management, doubts that the Politburo will signal a wider fiscal deficit, given that exports for now remain strong.
“The government seems reluctant to spend fiscal resources and build up debt,” said Zhang.
“There is a general consensus among policymakers and researchers that China needs to boost domestic demand. But there is no consensus how to do it.”
Investment weakens, consumption remains soft
Domestically, wages have not kept pace with the overall economy, even declining in some sectors.
Industrial overcapacity, US tariffs and price wars among producers have fuelled layoffs in factories, while weak demand and faster artificial intelligence adoption have slowed white-collar job creation.
The property downturn has eroded household wealth and curbed employment in construction since 2021.
The data showed property investment contracting 18 per cent year on year in the first six months, while home prices also eased.
Tens of millions of people have fallen out of formal employment into the gig economy, now working for ride-hailing and delivery platforms for long hours, low pay and inadequate social security benefits.
Investment is also slowing.
Local governments, which have been a key driver of investment in manufacturing and infrastructure and are often blamed for creating excess production capacity and misallocating resources in the process, are now under pressure to cut costs.
Emma Cheng, a 28-year-old nurse in Guilin – a major city in Guangxi, one of the fiscally weaker provinces in China – says her income “has fallen off a cliff” as the local medical sector is underfunded.
“In the past I would get gym memberships, beauty salon cards, Tencent Video subscriptions and replace my phone or iPad,” Cheng said. “I don’t dare spend on such things now.”
China’s fixed asset investment shrank 5.7 per cent year on year from January to June, with even state sector investment dropping 2.3 per cent.
“The primary drag on the headline growth figure stems from a deepening downturn in domestic investment activity,” said Andy Ji, an analyst at ITC Markets.
“Overall, a high-tech-driven industrial engine running alongside cratering domestic consumption and investment firmly highlights the economy’s deeply uneven growth momentum.”
Exports hold strong but risks abound
The onus is increasingly on exports to drive growth.
Trade data on Tuesday showed that external demand is so far compensating for China’s internal weakness, with exports beating expectations with a 27 per cent jump, riding the global AI boom.
This partly reflected frontloading by US retailers looking to secure inventories for Black Friday and Christmas holiday sales before expected tariff hikes later this year, shipping executives have said.
US President Donald Trump’s visit to China in May preserved the detente between the world’s two largest powers, but their trade relationship remains fragile.
A universal 10 per cent US tariff imposed by Washington in February, after the Supreme Court declared some earlier tariffs illegal, expires on Jul 24, but it is widely expected to be replaced with higher levies.
The US Trade Representative has proposed a 12.5 per cent tariff on imports from China and elsewhere following an investigation into forced labour, which Beijing denies, with a final decision expected in coming months.
Moreover, the European Union, whose trade deficit with China averaged US$1 billion a day in 2025, is working on bolstering protections of its industrial complex from Chinese competition.
And renewed conflict between the US and Iran fuels uncertainty over global growth.
Larry Hu, Macquarie Group’s chief China economist, said Beijing has little incentive to lean off external demand for now.
“What will cause the current situation to change is when exports fail,” Hu said. “When exports slow down, in order to still achieve the growth target, the government will do more on domestic demand.” REUTERS
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