China’s first-quarter GDP tops estimates at 5.4% as growth momentum continues amid tariff worries

China’s economy expanded by a better-than-expected 5.4% in the first quarter, maintaining a strong momentum, even as U.S. tariff threats prompt major investment banks to slash the country annual growth outlook.

The first-quarter GDP topped Reuters’ poll expectations for a 5.1% growth year on year, building on a recovery that began in late 2024, thanks to a broad policy stimulus push.

Retail sales in March rose by 5.9% year on year, according to data from National Statistics Bureau on Wednesday, sharply beating analysts’ estimates for a 4.2% growth. Industrial output expanded by 7.7% from a year earlier, versus median estimates of 5.8%.

Fixed asset investment grew 4.2% in the first quarter against estimates of a 4.1% increase in a Reuters poll. However, the drag from real estate worsened within fixed asset investment, down by 9.9% for the year as of March, while infrastructure and manufacturing investment picked up pace.

The urban unemployment rate slipped to 5.2% in March, following a two-year high of 5.4% in February.

The statistics bureau described the Chinese economy as “off to a good and steady start” and emphasized how “innovation [was] playing an increasingly leading role.” Chinese startup DeepSeek in January revealed its AI breakthrough that rivals tech from U.S.-based OpenAI.

But the bureau warned that “the external environment is becoming more complex and severe” and that domestic demand remained insufficient.

Despite the upbeat monthly data in March, “damage from the trade war will show up in the macro data next month,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, noting that “high frequency indicators suggest exports [have] slowed sharply in the region.”

The Chinese leadership has set an ambitious annual growth target of “around 5%” this year, a goal seen harder to achieve given the prospects of an escalating trade war and persistently lackluster domestic consumption.

“We must implement more proactive and effective macro policies, expand and strengthen the domestic economy … and actively respond to the uncertainties of the external environment,” the statistics bureau said in an English-language release.

The tit-for-tat tariff war with the U.S. has brought total levies imposed by U.S. President Donald Trump on Chinese goods to 145%, drawing retaliation from Beijing to raise levies on U.S. goods to 125%. Such levels of import duties are expected to dent China’s exports and knock several percentage points off the economy’s expansion this year.

“Growth is likely to deteriorate rapidly from the second quarter given the low possibility of near-term bilateral negotiations to establish an offramp for the 125% tariff hike,” a team of economists at Morgan Stanley said in a note earlier this week.

Several investment banks have cut China’s growth forecasts this year, with most economists doubting Beijing would achieve its official target, citing headwinds from the substantial increase in U.S. tariffs on Chinese goods.

On Tuesday, UBS Group added to a series of growth downgrades with the most pessimistic forecast among major banks, projecting China’s economy to expand just 3.4% this year as U.S. tariffs choke exports. The investment bank projects China’s exports to the U.S. to fall by two-thirds in the coming quarters, with overall exports declining 10% in dollar terms this year.

Pressure has been building on Chinese officials to release more forceful stimulus measures to prop up domestic consumption and the housing market, while reducing the economy’s reliance on exports and investment.

Morgan Stanley’s chief China economist, Robin Xing, expects Chinese authorities to frontload monetary easing steps in the second quarter, with a 50-basis-point cut in the reserve requirement ratio and a 15-basis-point cut in interest rates.

Beijing is likely to accelerate the issuance and deployment of local construction bonds and ramp up the consumer goods trade-in program with broader coverage or more generous subsidies, as well as a push for local governments to destock housing inventory, according to Morgan Stanley.

Xing also expects Beijing to unveil an additional fiscal stimulus of 1-1.5 trillion yuan in the second half-year to provide a partial offset to the tariff shock.