China braces for sluggish Q2 under weight of U.S. trade tensions

China’s economy slowed in the second quarter after a strong start to the year, hit by ongoing trade disputes and a prolonged property slump. This slowdown may push authorities to introduce new measures to keep growth on track.

To date, the globe’s second‑largest economy has avoided a big downturn, supported by a tentative trade agreement with Washington and the buffer of current policy measures. However, the sentiment among investors has turned cautious for the latter half of the year.

This is  marked by slow exports, persistent price declines and subdued consumer confidence.

Forecasts suggest Tuesday’s release at 2 am GMT will reveal 5.1% annual growth in Q2, down from 5.4% in Q1, according to the latest Reuters consensus.

“While growth has been resilient year‑to‑date, we still expect it to soften in the second half of the year, due to the payback of front‑loaded exports, ongoing negative deflationary feedback loop, and the impact of tariffs on direct exports to the U.S. and the global trade cycle,”said analysts at Morgan Stanley.

They added that “The third‑quarter growth could slow to 4.5 percent or lower, while Q4 faces unfavourable base effect, putting the annual growth target at risk.”

Beijing may announce more spending

Morgan Stanley anticipates that Beijing may roll out an extra fiscal package ranging from 500 billion to 1 trillion yuan starting towards the end of Q3.

June customs figures indicated a rebound in inbound shipments and a modest uptick in exports, driven by a rush to beat an early‑August tariff ceasefire deadline with the United States. Other June metrics on factory activity and consumer spending are forecast to decelerate further.

Quarter‑on‑quarter, the Reuters survey predicts GDP will have risen by 0.9% in Q2, after a 1.2% gain in Q1. Furthermore, analysts expect growth to moderate to roughly 4.6% in 2025, falling short of official ambitions, and slip to around 4.2% in 2026.

Investors are turning their attention to the late‑July Politburo session, anticipating cues on future policy moves and potential new economic support.

According to the survey, experts foresee a 10‑basis‑point reduction in the People’s Bank of China seven‑day reverse repo rate, and a comparable decrease to the loan prime rate, sometime in Q4.

Job market makes output cuts risky

So far this year, authorities have stepped up public works funding and expanded household subsidy programs, while the central bank in May trimmed borrowing costs and pumped cash into markets to offset trade‑related headwinds.

However, experts warn these measures might not be enough to stop the ongoing price drops. June’s producer price index plunged at a rate unseen in roughly two years, underlining persistent deflationary trends.

Observers expect officials to step up cuts to excess factory production and look for new ways to encourage domestic spending.

Analysts say it’s tricky to cut excess output without triggering major layoffs in a weakening job market.

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