China economy weakens further in May as retail sales post first drop in over three years

China’s retail sales fell for the first time in more than three years in May while urban investment contracted more than expected, piling pressure on Beijing to roll out meaningful stimulus to spur consumption, even as de-escalation in Middle East tensions offers some near-term relief.

Retail sales, a gauge of consumption, declined in May for the first time since December 2022, dropping 0.6% from a year earlier, according to the National Bureau of Statistics on Tuesday. The Labor Day holiday at the start of May failed to offset sluggish consumer spending, with Beijing scaling back trade-in subsidies earlier this year.

The sales contraction was a surprise as economists polled by Reuters had estimated flat growth. Fu Linghui, the bureau’s spokesperson, highlighted retail sales in goods and services combined eked out a 2.8% jump over the five months.

China’s urban fixed-asset investment, including real estate and infrastructure, contracted 4.1% this year as of end-May from a year earlier, compared with the estimated 2% decline and steepening from the 1.6% drop in the first four months this year.

Real estate dragged on investment, with inflows falling 16.2% in the January-to-May period. Manufacturing fixed-asset investment contracted for the first time since December 2020, Wind data showed, despite resilience in high-tech and policy-supported manufacturing. Investment in infrastructure grew 0.6% from a year earlier.

Industrial output was the lone bright spot, rising 4.5% in May to top estimates of 4.3% growth and rebounding from April’s near three-year low of 4.1%.

“The domestic imbalance between strong supply and weak demand is acute,” the statistics bureau said. “Some enterprises are facing considerable pressure in their operations,” the authority said, calling for development of new technology and greater employment support to achieve “an appropriate increase in economic output.”

The economy has shown signs of faltering following a strong first quarter. Growth slowed across the board in April, with industrial output and retail sales recording their weakest gains in years. In May, the official gauge on manufacturing activity slowed to 50, the threshold separating expansion from contraction.

During the extended holiday in early May, while boosting travel and dining activity, per capita spending lagged behind the same period in 2025, as consumers have grown more price-conscious.

“The weak retail sales data puts pressure on the government to consider policy measures to stabilize consumption,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, expecting the policy “fine-tuning” to come in July following the release of second-quarter GDP data.

The national unemployment rate fell to 5.1% in May, compared with 5.2% in April.

China’s economy has developed into what economists have termed a “K-shaped” growth model, with robust manufacturing and export sectors countering persistent weakness in property and consumer spending.

“China’s economy will slow with limited pickup ahead,” said Sheane Yue, senior economist at Oxford Economics, estimating the economy to expand 4.2% in the second quarter, drastically slowing from 5% growth in the first quarter.

President Donald Trump and Iran’s lead negotiator signed an agreement on Monday to extend a tenuous ceasefire by another 60 days and reopen the Strait of Hormuz, alleviating fears of a prolonged energy shock that has roiled global markets and clouded global growth outlook.

But the path to a durable resolution remains uncertain, and shipping through the Strait of Hormuz will take time to normalize, economists warned.

The country’s exports remained a standout area with double-digit growth in April and May, as surging renewables and AI-related demand largely offset the drag from the Middle East conflict.

The Iran war’s disruption to energy flows pushed up commodity costs, helping ease deflationary pressures that have plagued China for years — but the gains barely filtered through to consumer prices amid weak demand.

Producer inflation rose at the fastest pace in nearly four years in May, while consumer inflation came in at a modest 1.2%, as upstream suppliers absorbed higher costs rather than passing them on.

“Firms are absorbing higher costs amid weak pricing power, suggesting that new growth engines have yet to offset the drag from the old model,” said Yue, and a continued squeeze on corporate margins rather than the reflation policymakers seek.