China’s economy grew at its weakest pace in more than three years during the second quarter, falling short of expectations as subdued consumer spending offset robust manufacturing activity and exports. The slowdown has heightened concerns over the sustainability of China’s growth model, which remains heavily reliant on industrial output and external demand.
Gross domestic product (GDP) expanded 4.3 percent in the April-June period, down from 5 percent growth in the first quarter and below the lower end of Beijing’s 4.5-5 percent annual growth target.
China’s economy expands 4.7 percent in H1 2026
The weaker economic figures are increasing pressure on Beijing to introduce additional stimulus measures. Economists say the key issue facing China is not simply the speed of growth, but the structure of that expansion.
Data released on Wednesday showed retail sales increased by just 1 percent in June, while industrial output rose 5.3 percent, highlighting the economy’s continued dependence on manufacturing and overseas demand. The imbalance comes as trade partners criticize China’s export-driven model.
Despite the slowdown, China’s economy expanded 4.7 percent in the first half of the year, keeping growth broadly on track with Beijing’s annual target and reducing the immediate need for aggressive stimulus. Morgan Stanley lowered its full-year growth forecast to 4.6 percent from 4.8 percent, citing ongoing domestic challenges.
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Wage growth remains weak
Within the economy, wage growth has remained weak, with some sectors experiencing outright declines. Excess industrial capacity, U.S. tariffs and intensifying price competition among manufacturers have contributed to factory layoffs, while subdued demand and the rapid adoption of artificial intelligence have weighed on white-collar hiring.
The prolonged property market downturn has further pressured household wealth and weakened construction-related employment since 2021. Official data showed property investment fell 18 percen year-on-year in the January-June period, while home prices continued to decline.
Trade data released on Tuesday showed that overseas demand has so far helped cushion China’s domestic weakness, with exports surging 27 percent and outperforming expectations, supported by strong global demand linked to the artificial intelligence boom.
The increase was partly driven by U.S. retailers bringing forward orders to build inventories ahead of Black Friday and the holiday shopping season, as they sought to avoid the impact of potential tariff increases expected later this year.
While U.S. President Donald Trump’s visit to China in May helped maintain a fragile easing of tensions between the world’s two largest economies, the broader relationship remains vulnerable. A blanket 10 percent U.S. tariff introduced in February — after the Supreme Court ruled some earlier tariff measures unlawful — is set to expire on July 24, with markets expecting it to be replaced by higher duties.
The U.S. Trade Representative has proposed a 12.5 percent tariff on imports from China and other countries following an investigation into alleged forced-labor practices, a claim Beijing has rejected. A final decision is expected in the coming months.
Meanwhile, the European Union, which recorded an average trade deficit of $1 billion a day with China last year, is preparing measures to shield its industrial sector from increased competition from Chinese manufacturers. Renewed tensions between the United States and Iran have also added to uncertainty surrounding the global economic outlook.
