China's recovery sputters as output and retail sales miss forecasts

China's economy showed renewed signs of weakness at the start of the third quarter, as industrial output and retail sales both grew more slowly than expected in July. The data, released by the National Bureau of Statistics on Monday, adds to pressure on policymakers to deliver more effective stimulus.

Factory output rose 4.5% year-on-year last month, down from 5.3% in June and below the 4.8% forecast in a poll of economists. Retail sales grew just 0.6%, slowing from a 1% rise in June and well short of the 1.5% that analysts had predicted.

Fixed-asset investment also contracted more sharply than expected, falling 6.7% in the first seven months of the year compared with a forecast 6% decline. The drop deepened from a 5.7% fall in the January-June period.

Analysts said the figures point to the limits of existing policy measures. "Fiscal spending has lagged behind," said Xu Tianchen, senior economist at the Economist Intelligence Unit, calling for bolder use of available funds. He noted that the sharp decline in investment would be a particular concern for Beijing.

Extreme weather added to the headwinds. Three typhoons made landfall in July, forcing millions of people to relocate across eastern and southern manufacturing hubs, likely disrupting both production and consumer activity.

The property sector remains a key drag. New home prices fell 3.2% in July from a year earlier and 0.1% from June. With an estimated 52% of household wealth tied up in real estate, the prolonged slump continues to weigh on consumer confidence and spending.

Some of the retail slowdown was attributed to a payback effect from last year's consumer goods trade-in scheme, which had pulled demand forward. Subsidy distribution also weakened in July, with daily average sales from the programme dropping to 6.3 billion yuan from 9 billion yuan in June.

Exports remain a relative bright spot, supported by global demand for AI infrastructure. The trade surplus exceeded $100 billion for another month, putting the full-year total on track to top $1 trillion for a second straight year. That has drawn scrutiny from trading partners, with the European Union weighing new measures and the US announcing fresh tariffs on Chinese goods.

NBS spokesperson Fu Linghui said officials would step up counter-cyclical adjustments to bolster domestic demand, and expressed confidence that the economy could still achieve its growth target of 4.5% to 5% this year.

"The emerging pattern is one of selective strength amid broad softness," said Yuhan Zhang, principal economist at The Conference Board's China Center. "The question is whether policy-supported pockets of activity can eventually generate a broader recovery in household spending and private investment."