China’s economic recovery lost momentum in July, with consumer spending, investment and industrial production all coming in weaker than expected, raising pressure on Beijing to introduce additional measures to support growth in the second half of the year.
Retail sales increased 0.6% from a year earlier, according to data from the National Bureau of Statistics on Monday.
The figure was well below the 1.5% growth forecast and marked a slowdown from the 1% increase recorded in June.
Industrial output also weakened, rising 4.5% year-on-year in July compared with expectations for a 4.8% increase.
Growth had reached 5.3% in June.
The urban unemployment rate edged up to 5.2% from 5% in June, adding to concerns over household confidence and spending.
The figures came after China’s economy expanded 4.3% in the second quarter, its slowest pace since late 2022.
Growth of 4.7% in the first half nevertheless leaves the country broadly on track to meet Beijing’s 2026 growth target range of 4.5% to 5%.
Investment downturn deepens
Investment provided another major warning sign in the July data.
Urban fixed-asset investment, which includes spending on infrastructure, manufacturing and property, fell 6.7% in the first seven months of the year compared with the same period last year.
The decline was steeper than the 6% contraction economists had expected and followed a 5.7% decline during the first half.
The weakness highlights the continuing damage from China’s prolonged property downturn, while tighter borrowing constraints facing local governments have limited another traditional source of investment.
Urban investment had already declined 3.8% last year, marking its first annual contraction in decades.
The deterioration has since accelerated, underscoring the difficulty policymakers face in replacing property and infrastructure as engines of growth.
In a CNBC report, Li Daokui, a professor of economics at Tsinghua University, described the intensity of the investment pullback as “unprecedented” and identified contracting investment and high youth unemployment as major obstacles to meeting China’s growth objectives.
Li has called for a substantial expansion in government borrowing, suggesting that this year’s planned 12 trillion yuan ($1.7 trillion) in new debt issuance should more than double.
Consumer spending remains a weak spot
The weakness in retail sales is particularly significant because Beijing has been attempting to shift China’s growth model towards greater domestic consumption.
Goldman Sachs estimates that nominal retail sales growth slowed to 1.3% in the first half of the year from 5% during the same period last year.
The bank has attributed much of the slowdown to the government’s trade-in subsidy programme, which encouraged consumers to bring forward purchases but has subsequently become a drag on spending.
“Real momentum was likely even weaker given higher CPI inflation,” Goldman economists said in a note.
Goldman expects retail sales growth to remain subdued during the second half as the fading impact of the trade-in programme weighs on demand. It forecasts full-year retail sales growth of around 1.5%.
Weak household demand is also visible in credit markets. New bank lending in July recorded its largest monthly decline on record, according to Barclays’ calculations of official data.
Household loans, including mortgages, also contracted after a brief recovery in June.
Jobs and manufacturing add to concerns
The employment picture could be weaker than official figures indicate.
A private survey conducted by a team led by Li found China’s broad unemployment rate at 10.2% in July, significantly above the official rate.
The survey includes people who have been unemployed for two years and are no longer captured by the official labour force survey.
More than half of the estimated 24 million long-term unemployed were aged between 16 and 24, according to the survey.
Manufacturing conditions have also deteriorated.
China’s official manufacturing purchasing managers’ index contracted unexpectedly in July, marking its first contraction since February as domestic orders weakened.
Typhoons, heavy rainfall and disruptions at ports also affected business activity and construction during the month.
The slowdown leaves Beijing facing a difficult policy balancing act.
Strong industrial production and exports, particularly those linked to the global artificial intelligence investment boom, have helped support headline growth.
But weak consumption, property investment and employment are creating a widening gap between China’s manufacturing strength and domestic demand.
The July data could therefore increase expectations for additional fiscal and monetary support as policymakers seek to sustain growth through the remainder of the year.
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