China’s Economy Shows Deepening Split as Consumption Weakens While Industrial Output Gains Strength

BY EMMANUEL OGBONNA

China’s economic performance in May highlighted a widening divergence between weakening domestic demand and strengthening industrial activity, underscoring the uneven nature of the country’s post-pandemic recovery.

Fresh official data released on Tuesday showed that retail spending contracted for the first time in more than three years, investment conditions deteriorated further, and property sector weakness persisted, even as factory output accelerated on the back of resilient external demand.

Retail sales, a closely watched indicator of household consumption, fell 0.6% in May compared with a year earlier, marking the first year-on-year decline since December 2022. The result reversed April’s modest 0.2% increase and came in below market expectations, which had anticipated flat growth. The drop points to renewed fragility in consumer behaviour at a time when policymakers have been trying to stimulate spending through incentives and trade-in programs.

The weakness was particularly visible in discretionary spending categories, with the automotive sector continuing to weigh heavily on overall consumption. Domestic car sales declined for the eighth consecutive month, reflecting sustained pressure in the world’s largest auto market. Industry analysts suggest that pricing competition, cautious household sentiment, and concerns about future income stability are all contributing to subdued demand.

Spending during the five-day Labour Day holiday in May also failed to provide a meaningful boost, despite typically being a peak travel and consumption period. While government-supported trade-in schemes for consumer goods had previously helped support demand, their effect appears to be diminishing. A higher comparison base from the same period last year also contributed to the year-on-year decline in retail figures.

On the ground, businesses in major urban centres are reporting softer activity. In Shanghai’s financial district, some service-sector operators say corporate clients have tightened entertainment and hospitality budgets. One bar manager described a noticeable decline in foot traffic, noting that group discount promotions have helped bring in customers but have also reduced profit margins. He added that even high-profile events have failed to significantly lift late-night spending, with customer volumes in June reportedly weaker than in May, despite the earlier holiday boost.

Economists say the latest data reinforces the view that China’s recovery is becoming increasingly reliant on uneven drivers. One analyst noted that weak retail figures increase the likelihood of additional policy support in the coming months, suggesting that authorities may consider targeted measures after second-quarter growth data is released.

In contrast to subdued consumption, industrial production showed renewed momentum. Factory output rose 4.5% in May compared with a year earlier, improving from April’s 4.1% increase and exceeding expectations. The gains were supported by robust external demand and continued expansion in high-technology manufacturing, which has been a key area of policy focus.

High-tech industrial production surged 15.1% year-on-year, reflecting strong global demand linked to artificial intelligence development, advanced electronics, and related supply chains. This strength has helped offset broader concerns about weaker domestic consumption and potential disruptions from geopolitical tensions. Export-oriented manufacturing has therefore become an increasingly important stabilising force for the economy.

Despite this strength, analysts point to structural imbalances. The gap between external and internal demand is widening, with manufacturing and export sectors outperforming services and household consumption. There is also a growing divergence between advanced technology industries and traditional manufacturing, which continues to face margin pressure and uneven demand conditions.

Fixed-asset investment data added to concerns about slowing momentum. Investment fell 4.1% in the first five months of the year compared with the same period a year earlier, deepening from a 1.6% decline recorded in the January–April period. The reading was significantly weaker than market forecasts and reflects continued strain across both public and private investment channels.

Officials attributed part of the slowdown to seasonal and environmental factors, including unusually high temperatures and heavy rainfall in certain regions, as well as the broader transition toward new growth drivers. Authorities maintain that China still has significant investment potential, pointing to ongoing urbanisation, rural development initiatives, expansion of advanced productive industries, and improvements in public services as areas that could support future growth.

However, the property sector continues to be a major drag on overall investment. Real estate investment fell 16.2% in the January–May period, worsening from a 13.7% decline in the first four months of the year. Property sales and new construction activity also weakened further, underscoring persistent challenges in a sector that has historically played a central role in China’s economic expansion.

Housing market indicators remain subdued. New home prices fell slightly faster on a monthly basis in May, even though some larger cities showed early signs of stabilisation. Broader indicators of mortgage lending released earlier suggest households remain reluctant to take on debt, with concerns about income growth, job security, and property market stability continuing to weigh on buyer sentiment.

Labour market conditions remain another area of focus. While survey-based unemployment edged down slightly to 5.1% from 5.2% in April, pressure persists as millions of university graduates enter the job market during the summer recruitment period. Structural concerns about job displacement linked to automation and artificial intelligence are also contributing to worker anxiety, particularly among younger cohorts entering the workforce.

Despite these challenges, exports continue to provide a crucial buffer for the economy. Strong international demand for Chinese manufactured goods has helped support growth even as domestic consumption weakens. However, economists warn that a rapidly expanding trade surplus could increase tensions with key trading partners, particularly in Europe, where concerns about industrial competition and market imbalances are rising.

Analysts broadly expect China’s economy to maintain moderate growth in the second quarter, though at a slower pace than earlier in the year. Some forecasts suggest expansion could ease to around 4.5%, down from approximately 5% in the first quarter. While full-year growth targets may still be achievable, economists caution that sustained softness in domestic demand will likely require additional policy adjustments in the second half of the year to stabilise momentum.