China's July Data Shows Slowing Economy as Domestic Demand Stays Weak

China's economic recovery stumbled at the start of the third quarter, as fresh data showed factory output and retail sales growing slower than expected in July. The figures, released by the National Bureau of Statistics, underscore the persistent weakness in domestic demand and add to pressure on policymakers to consider further stimulus.

Industrial production expanded 4.5% year-on-year in July, a slowdown from the 5.3% growth recorded in June and below the 4.8% forecast. Retail sales rose just 0.6%, a sharp deceleration from the 1% increase in the previous month and well short of the 1.5% analysts had predicted.

Economists attribute the disappointing performance partly to a lag in fiscal spending. Xu Tianchen, senior economist at the Economist Intelligence Unit, noted that the ineffective use of existing policy measures, particularly the slow pace of government spending, has hampered growth. He also flagged a sharp decline in investment as a major concern.

Fixed-asset investment contracted 6.7% in the first seven months of the year, a steeper drop than the 6% decline that was expected and worse than the 5.7% fall recorded in the January-June period.

An NBS spokesperson said officials would step up counter-cyclical policy adjustments to bolster domestic demand. However, reviving spending among China's 1.4 billion people remains a challenge while the property sector stays in a slump. New home prices fell 3.2% in July from a year earlier, and economists estimate that roughly half of household wealth is tied up in real estate.

Extreme weather also played a role in the weak data. Three typhoons made landfall in July, disrupting activity in manufacturing hubs along the eastern and southern coasts.

While exports continue to provide a buffer, supported by global demand for AI infrastructure, the economy remains vulnerable to shocks. China posted another monthly trade surplus of over $100 billion, but this has strained relations with trading partners, including the US and the European Union, who are considering tougher measures.

Beijing has pledged to accelerate fiscal spending and introduce new policies in a timely manner, but has yet to signal any major new stimulus package.