China posted Q1 GDP growth of 5.4% y-o-y, identical to Q4 2024. Although impressive, the data does not yet reflect the impact of US tariffs. More than ever, China needs fiscal reforms to boost domestic consumption to reach its 2025 5% GDP growth target.

China’s Q1 GDP growth of 5.4% y-o-y was identical to Q4 2024 and exceeded the 5.1% consensus forecast. However, on a quarter-on-quarter basis, Q1’s GDP softened compared to the previous quarter at 1.2% vs 1.6%. March’s retail sales increased by 5.9% from 4.0% during the January–February period, exceeding market expectations of 4.2%. Higher sales reflect China’s recent measures aimed at stimulating consumer spending through trade-in schemes.

China’s fixed-asset investment grew by 4.2% y-o-y in Q1 compared to a 3.3% average in Q4 2024. The increase was observed across all major sectors except for real estate investment, which continued to decline with a 9.9% y-o-y drop. Industrial production also rose by 7.7% y-o-y vs 5.9% in the January–February period.

Notably, exports increased 12.4% y-o-y last month in US dollar terms as businesses frontloaded outbound shipments to avoid the prohibitive 145% US tariffs, while imports showed an 8.4% y-o-y decline, an indication of persistent weak domestic demand.

China’s exports to the USA rose by 9.1% y-o-y last month in US dollar terms and the USA remains China’s largest trading partner on a single-country basis, accounting for about 10% of total trades. China’s March exports to ASEAN and the EU rose 11.6% and 10.3% respectively.

With tariffs kicking in this month, exports to the USA are likely to drop sharply in Q2. However, China may try to offset the decline by increasing shipments to Southeast Asia and the EU. China may also let the Yuan depreciate to offset the tariffs impact, although the weakness of the US dollar reduces the Chinese Central Bank’s (PBOC) room for manoeuvre.

For China to reach its 2025 5% GDP growth target, it needs to stimulate domestic consumption with fiscal, and not only monetary measures, although it is likely that a policy mix will be the PBOC’s strategy. Property prices are still falling (down 4.8% y-o-y in February) and the negative CPI (-0.1% in February) suggests that deflationary forces are still gripping the economy.

Project Blue has kept its 2025 GDP growth forecast for China unchanged at 4.5%, subject to changes in tariffs as uncertainty remains this year’s key feature.