China consumption miss overshadows factory strength amid tariffs
China's industrial output expanded faster than expected in April while consumption disappointed, highlighting the challenges facing the world's second-largest economy despite a quick de-escalation of trade tensions with the U.S.
Industrial output climbed 6.1% on year in April, slowing from the prior month but far exceeding the median estimate in a Bloomberg survey of analysts. Retail sales growth, a key gauge of consumption, also weakened from March to 5.1%, according to figures published by the National Bureau of Statistics on Monday, below economists' projection.
Despite the resilience of factories, weaker consumption for April points to the need for more supportive policies as economists warn of complacency after a 90-day pause on tariffs. China's prolonged property crisis, deflationary pressure and worries about unemployment are weighing on confidence among households.
The government, which set an ambitious economic growth target of about 5% for 2025, has previously made boosting domestic consumption a priority this year.
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"Rosy industrial production figures reflect only one part of the economy,' said Raymond Yeung, chief economist for Greater at Australia & New Zealand Banking Group. "But April retail sales figures show that people are not willing to spend. To achieve 5% growth, we still need consumption.'
The urban jobless rate fell slightly to 5.1% in April, while growth in fixed-asset investment slowed to 4% in the first four months of the year. China's new home prices dropped at a faster pace in April.
The offshore yuan held little changed after the data release. Yields on China's 10-year government bonds edged lower slightly to 1.67%. A gauge of Chinese stocks listed in Hong Kong pared early losses following the data.
The snapshot of the economy offers the fullest look yet at how China coped with a drastic escalation in trade tensions with the U.S. While the two sides in May reached the truce in their tariff war, the uncertainty surrounding further negotiations toward a final deal could keep businesses cautious about expanding production or investing in new projects.
Still, the surprise performance of industrial production provides further evidence that China was able to dodge a steep slowdown as it navigated the onset of U.S. President Donald Trump's trade war. Exports in April also rose more than forecast, as companies diverted goods to Southeast Asia and Europe to compensate for a plunge in shipments to the U.S.
A few major international banks including Goldman Sachs Group upgraded their forecasts for China's 2025 growth last week, although their views remain below Beijing's target. Many economists are also expecting the de-escalation to buy the government more time before it needs to deploy more stimulus to prop up the economy.
The agreement "between the U.S. and China could have reduced tariff uncertainties while domestic policymakers could further switch into a wait-and-see mode,' Citigroup economists including Xiangrong Yu wrote in a note last week.
Morgan Stanley economists including Robin Xing have dialed back their expectations on a supplementary fiscal package to up to 1 trillion yuan ($139 billion) in the fourth quarter, from a previous forecast of as much as 1.5 trillion yuan in July-September.
Consumer sentiment has remained fragile amid the property slump and concerns the trade war could cause layoffs in China's massive manufacturing and export sectors.
In April, China's program to subsidize purchases of new consumer goods probably contributed to huge gains in sales of home appliances, telecommunications equipment and furniture.
At the same time, car purchases — which account for nearly a 10th of total retail sales — grew less than 1% after an increase of 5.5% in March.
"This indicates that while measures such as the trade-in policy indeed can help stabilize short term consumption, a more sustainable recovery of consumption may require an improvement in consumer sentiment,' said Lynn Song, ING's chief economist for greater China. That "requires a broader stabilization of asset prices and a recovery of wage growth,' he added.
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