China’s GDP Beats Expectations—But US Tariff Shock Looms

China’s economy exceeded growth expectations in Q1 2025 with a 5.4% expansion, but optimism is fading as U.S. tariffs ramp up under Donald Trump’s renewed trade offensive. While domestic consumption and industrial output have shown signs of life, economists warn that China’s export engine is at serious risk, unemployment remains a concern, and policymakers face a difficult balancing act in navigating the turbulence ahead.

China's Economic Resilience Faces Its Biggest Test Yet

China’s economy kicked off 2025 on a surprisingly strong note, but optimism is quickly giving way to concern as the country braces for a potential economic storm—one stirred not by internal weaknesses, but by intensifying pressure from across the Pacific.

According to government data released this week, China’s GDP grew 5.4% year-on-year in the first quarter, surpassing market expectations of 5.1% and holding steady with the previous quarter’s performance. The uptick was fueled by robust domestic consumption and a rebound in industrial output, signaling that Beijing’s earlier stimulus efforts were beginning to take effect.

But behind the headlines lies a deepening worry: the United States’ latest round of punitive tariffs could pull the rug out from under China’s fragile recovery. Former President Donald Trump, campaigning on an aggressive “America First” trade platform, recently pushed tariffs on Chinese goods to a staggering 145%. Beijing retaliated in kind, raising its duties on U.S. imports to 125%, reigniting fears of a full-blown trade war that could throttle global supply chains and send ripples through international markets.

A Strong Start, But for How Long?

Xu Tianchen, senior economist at the Economist Intelligence Unit, called the first-quarter growth “a very good start,” but warned that China’s track record in recent years has been a tale of two halves—a buoyant first quarter followed by a sluggish second. “A forceful and timely policy response is needed,” he said, especially given the looming threat of further U.S. trade aggression.

Retail sales rose 5.9% year-on-year in March, a strong rebound from the 4.0% gain in January-February, driven by surging sales in home electronics and furniture under a new government trade-in scheme. Factory output also impressed, accelerating to 7.7% growth in March. Yet the property sector—a vital pillar of the Chinese economy—continues to drag. Investment in real estate dropped nearly 10% from a year earlier, while new home prices remained flat.

The Export Engine Under Siege

China’s exporters have long acted as a ballast during domestic downturns, and last year’s trillion-dollar trade surplus helped keep growth on track. But analysts say this cushion may soon deflate. The recent spike in March exports may prove deceptive, with factories rushing to ship goods before U.S. tariffs kicked in. UBS warns that export numbers could plunge in the months ahead, especially if the tariffs stay in place.

The Swiss bank downgraded its 2025 GDP forecast for China to 3.4%, citing the “unprecedented challenges” of the U.S. tariff regime. ANZ also cut its forecast to 4.2%, predicting a drawn-out adjustment in China’s trade-dependent economy.

Premier Li Qiang acknowledged the gravity of the situation earlier this week, stating that China’s exporters must prepare for “profound” external changes and vowing to expand domestic consumption to compensate.

Unemployment and Deflation Still Haunt the Outlook

Despite the headline growth figure, China's broader economic picture remains uneven. Unemployment—especially among youth—remains elevated, while deflationary trends continue to sap consumer confidence and business margins. Property investment, long seen as a growth engine, is still in retreat, and new credit data suggests weak demand for loans even amid looser monetary policy.

“Good GDP does not represent the overall health of an economy,” noted ANZ’s Raymond Yeung. “Deflation and youth unemployment remain the primary concerns.”

Policy Dilemma: Stimulate or Stabilize?

China’s policymakers have made it clear they have tools at their disposal—and they may need to use them. With the global economy still shaky and geopolitical tensions rising, further fiscal stimulus and monetary easing seem likely. But stimulus comes with its own set of risks: swelling government debt and a possible downgrade in sovereign creditworthiness, as Fitch signaled earlier this month.

“The current situation is similar to the negative shocks China experienced in the past, such as the COVID-19 outbreak in 2020 and the global financial crisis in 2008,” Yeung added. “We see limited options for Chinese authorities against the tariff shock except a large fiscal expansion.”

China’s economy, for now, is showing resilience. But if the full force of America’s tariff storm hits in the coming months, that resilience may be tested like never before.