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China: 1Q25 GDP growth beat estimates but 2025 growth outlook downgraded as trade war escalates
- The strong growth in the industrial sector due to frontloading activities continued to drive China’s economic outperformance in 1Q25. Retail sales and urban fixed asset investment (FAI) also came in above expectation in Mar and the national surveyed jobless rate eased back to 5.2%.
- Despite the robust 1Q25 GDP, a downgrade to our full-year growth forecast is inevitable given the US-China tariff escalation. We have earlier highlighted that the impact on China’s GDP growth could be as high as 2% point on a full-year basis if the exorbitant tariffs stay in place, with severe repercussions on export and investment. The strong improvement in Mar retail sales is also unlikely to sustain against this backdrop while the domestic challenges including real estate market, unemployment and fragile consumer sentiment remain.
- Hence, we revert our 2025 GDP growth forecast to where it was at the end of last year, at 4.3% (from current 4.7%). We expect growth to slip below 4% in 2H25. Having said that, there remains a high degree of uncertainty in our estimate depending on when we get a breakthrough in the US-China trade negotiations and the eventual tariff rates. Meanwhile, we maintain our forecast for China’s growth at 4.2% for 2026. The risks are tilted to the downside.
- Amid a slowdown in both external and domestic demand, deflationary pressure is likely to intensify, increasing prospects of stronger fiscal and monetary policy responses from China. We expect the PBOC to frontload its monetary policy easing to stabilise markets with near-term prospects of a cut in banks’ reserve requirement ratio (RRR) by 100 bps as well as the 7-day reverse repo rate by 20 bps to 1.30% by end-2Q25. The 7-day reverse repo rate and RRR cuts totaled 30 bps and 100 bps respectively last year.
Above consensus growth in 1Q25
China’s economy expanded at a stronger-than-expected pace in 1Q25 while this was in line with our estimate. GDP growth stabilized at 5.4% y/y, 1.2% q/q sa in 1Q25 (Bloomberg’s est: 5.2% y/y, 1.4% q/q; UOB est: 5.4% y/y, 1.5% q/q), vs. 5.4% y/y, 1.6% q/q sa in 4Q24.
The strong growth in the industrial sector due to frontloading activities continued to drive China’s economic outperformance in 1Q25. By the three major industries, growth picked up in the secondary industry to 5.9% y/y (4Q24: 5.2%) – highest in a year – while moderating in the tertiary industry to 5.3% y/y (4Q24: 5.8%) and primary industry to 3.5% y/y (4Q24: 3.7%).
Broad-based recovery in March
Industrial production (IP) surged by 7.7% y/y in Mar (Bloomberg est: 5.9% y/y, Jan-Feb: 5.9%) as manufacturers rushed out orders before higher US tariffs hit. This is the fastest pace since Jul 2021. The momentum has stayed positive as IP posted 12 straight months of sequential gains, rising 0.44% m/m in Mar vs. 0.51% m/m in Feb.
Production was driven by the manufacturing sector which rose 7.9% y/y (Jan-Feb: 6.9%) with the high-tech production growth accelerating to 10.7% y/y (Jan-Feb: 9.1%). Output in the electricity, gas & water production and mining & quarrying industry rose 3.5% y/y (Jan-Feb: 1.1%) and 9.3% y/y (Jan-Feb: 4.3%) respectively.
Manufacturing industries such railway, ships, aircraft & other transportation (+19.0% y/y), communication equipment, computer & other electronic equipment (+13.1% y/y), electrical machinery & equipment (+13.0% y/y), automobiles (+11.5% y/y) led the robust growth in Mar.
Downgrading our GDP forecast for 2025 to 4.3%
Despite the robust 1Q25 GDP, a downgrade to our full-year growth forecast is inevitable given the US-China tariff escalation. We have earlier highlighted that the impact on China’s GDP growth could be as high as 2% point on a full-year basis if the exorbitant tariffs stay in place, with severe repercussions on export and investment. The strong improvement in Mar retail sales is also unlikely to sustain against this backdrop while the domestic challenges including real estate market, unemployment and fragile consumer sentiment remain.
Hence, we revert our 2025 GDP growth forecast to where it was at the end of last year, at 4.3% (from current 4.7%), while taking into account potential offsetting policy measures ahead. We expect growth to slip below 4% in 2H25. Having said that, there remains a high degree of uncertainty in our estimate depending on when we get a breakthrough in the US-China trade negotiations and the eventual tariff rates. Chinese policymakers are expected to increase their policy support at a measured rate, targeting domestic consumption and investment to offset the negative external outlook in view of the official growth target of “around 5%”. Meanwhile, we maintain our forecast for China’s growth at 4.2% for 2026. The risks are tilted to the downside.
Amid a slowdown in both external and domestic demand, deflationary pressure is likely to intensify, increasing prospects of stronger fiscal and monetary policy responses from China. We expect the PBOC to frontload its monetary policy easing to stabilise markets with near-term prospects of a cut in banks’ reserve requirement ratio (RRR) by 100 bps as well as the 7-day reverse repo rate by 20 bps to 1.30% by end-2Q25. The 7-day reverse repo rate and RRR cuts totaled 30 bps and 100 bps respectively last year.
For the full-year, we retain our call for 30 bps cut to the benchmark 7-day reverse repo rate (with loan prime rates to fall by 30 bps). These moves will bring the 7- day reverse repo rate, 1Y LPR and 5Y LPR to 1.2%, 2.8% and 3.3% by end-2025.
Ho Woei Chen
Economist
Follow Woei Chen on LinkedIn
