China’s remarkable economic resilience appears to be waning as the world’s second-largest economy faces mounting pressures that threaten to derail its recovery from the pandemic era.
After posting a surprisingly robust 5.4% growth in the first quarter of 2025, economists now warn that the momentum is dissipating as a perfect storm of challenges converges on Beijing.
The economic outlook has darkened considerably since those encouraging first-quarter figures. Trade tensions with the United States have intensified under President Trump’s renewed tariff offensive, adding fresh deflationary pressures to an economy already grappling with weak domestic demand.
The fragile U.S.-China trade truce that helped cushion the initial blow appears increasingly strained, leaving Chinese policymakers scrambling to find new sources of growth.
Market analysts paint a sobering picture for the months ahead. GDP growth is projected to decelerate sharply to 4.5% in the third quarter and further to 4.0% in the fourth quarter, according to recent polling data. This trajectory would mark a significant departure from the solid start to the year and underscore the mounting economic headwinds facing Beijing.
“We see a demand cliff in the second half, driven by multiple factors,” warned Ting Lu, chief China economist at Nomura, highlighting the convergence of challenges that include slowing exports under U.S. tariffs, the fading boost from consumer goods trade-in programs, austerity measures, and a protracted property market slump.
The quarterly data tells a stark story of deceleration. After expanding 1.2% in the first quarter on a seasonally adjusted basis, the economy is forecast to slow to just 0.9% growth in the second quarter. This cooling reflects the complex interplay of external pressures and internal structural challenges that have proven resistant to traditional policy interventions.
Perhaps most concerning for policymakers is the persistent deflationary spiral that has gripped the economy. China’s GDP deflator—the broadest measure of price changes across goods and services—is expected to decline further in the second quarter, marking a ninth consecutive quarterly drop. This represents the longest deflationary streak since records began in 1993, highlighting the depth of the economic malaise.
The inflation picture remains equally troubling. Consumer prices are expected to rise by a meager 0.1% this year, falling far short of the government’s target of around 2%. This anemic price growth reflects weak domestic demand and overcapacity across multiple sectors, creating a vicious cycle that traditional monetary policy tools have struggled to break.
Beijing’s response has been characteristically aggressive on the fiscal front. The government has ramped up infrastructure spending and expanded consumer subsidies, while the central bank has maintained a steady pace of monetary easing. In May, authorities cut interest rates and injected additional liquidity as part of broader efforts to cushion the economy from Trump’s escalating trade war.
However, analysts increasingly question whether stimulus measures alone can address the underlying structural challenges. The property sector, once a reliable engine of growth, remains mired in a protracted downturn that shows little sign of resolution. Consumer confidence has been shaken by job market uncertainty and deflationary expectations, making households reluctant to spend despite government incentives.
Looking ahead, economists expect the central bank to cut its key policy rate by 10 basis points in the fourth quarter, accompanied by similar reductions to the benchmark loan prime rate. Reserve requirement ratios are also expected to be lowered by 20 basis points during the same period, providing additional liquidity to the banking system.
For the full year 2025, China’s GDP growth is forecast to cool to 4.6%, falling short of the official target and marking a significant deceleration from last year’s 5.0% performance. The outlook for 2026 appears even more challenging, with growth expected to ease further to 4.2%, raising questions about the sustainability of China’s economic model.
The implications extend far beyond China’s borders. As the world’s second-largest economy and a critical component of global supply chains, China’s economic trajectory will have profound implications for global growth, commodity markets, and trade flows. The prospect of prolonged Chinese economic weakness adds another layer of uncertainty to an already fragile global economic recovery.
Chinese government advisers are now stepping up calls to fundamentally reshape the economy’s growth model, prioritizing household consumption over investment and exports. The upcoming five-year policy plan is expected to place greater emphasis on domestic demand and supply-side reforms to address excess industrial capacity—a recognition that the old playbook may no longer be sufficient.
The government is scheduled to release second-quarter GDP data and June economic indicators at 0200 GMT on July 15, providing the first official confirmation of whether the economy has indeed entered the more challenging phase that economists fear.
The numbers will be closely watched for signs of how effectively Beijing’s latest stimulus measures are working and whether the world’s second-largest economy can navigate the treacherous waters ahead.
WHAT YOU SHOULD KNOW
China’s economy is losing steam after a strong start to 2025, with growth projected to fall from 5.4% in Q1 to just 4.0% by Q4. The main culprit is a toxic combination of Trump’s renewed trade war, persistent deflation (now in its ninth consecutive quarter), and weak consumer spending.
Despite aggressive government stimulus measures, Beijing faces a fundamental challenge: traditional policy tools aren’t solving the structural problems of overcapacity, property market collapse, and household reluctance to spend.
