China started the year 2025 with robust GDP growth. Nordea Chief Economist Tuuli Koivu also observed slightly better sentiment during her trip to the country in March. However, the intensified trade war between the US and China is going to hurt the growth and CNY outlook in the coming months.
Consumption growth picked up in Q1
China’s GDP growth (5.4% y/y and 1.2% q/q) surprised to the upside at the beginning of the year. Growth was driven by stronger consumption, fixed asset investments in manufacturing and infrastructure and export growth. The negative effect from the housing market downturn became somewhat smaller.
China’s National People’s Congress (NPC) again set the official growth target for 2025 at 5%, which we don’t view as a realistic target, although the official numbers probably will point in that direction. Prior to the trade war escalation, our forecast for China was 4.5%, but recent developments suggest downside risks. Depending on the size of the negative confidence effects, the trade war as it stands now (145%/125% tariffs on the trade with the US but certain electronics excluded) could reduce China’s growth rate by 0.5-2% points in 2025.
China trip revealed stronger optimism
My recent trip to China in March revealed a somewhat more positive outlook for China compared to when I was last there in the autumn of 2023. The main reason for the optimism was China’s rapid technological development, particularly in AI and other technologies. However, weaknesses persist, including worries about the labour market and sluggish wage growth.
The housing sector remains a concern, with high vacancy rates and declining rents in many cities. Overall, there’s slightly more optimism about the consumption outlook, but it would probably not be realistic to expect any dramatic turn for the better, given the structural challenges.
Key takeaways from the China analysis
China’s GDP growth at 5.4% y/y was robust in January-March thanks to slightly stronger momentum in consumption and rapid export growth.
China’s official growth target of 5% for 2025 is unrealistically high.
The intensified trade war will hit China’s outlook. Our earlier 4.5% GDP forecast faces clear downside risks. There is still significant uncertainty around the possible developments and impacts of the trade war, but the negative effect could be around 0.5-2% of GDP.
The Chinese leaders may increase stimulus and weaken the CNY to partly compensate for the trade war, but it is also possible that they accept a significantly lower growth rate for 2025 and blame the US for that.
Fiscal stimulus worsens the problem of overcapacity
China’s growth in recent years has relied heavily on fiscal stimulus, which has boosted fixed asset investments in manufacturing and infrastructure. Although we now expect consumption to play a somewhat more important role in the economy, the fiscal stimulus increase of nearly 2% of GDP announced at the National People’s Congress in March implies that strong growth in fixed asset investment in many sectors will continue in 2025.
However, this has worsened the problem of overcapacity, negative price pressures and low profitability. The trade war and weaker global outlook may exacerbate these issues.
While the Chinese leadership has emphasized promoting consumption, concrete measures have remained limited. The broadly defined public sector deficits are already large (8-13% of GDP), limiting the potential for significant household income boosts.
Is China ready for a trade war?
China has been decreasing its dependency on the US economy, investing in self-sufficiency and strengthening ties with emerging markets. However, the intensified trade war will still hurt China’s growth prospects. We estimate the total effect of the trade war to remove 0.5-2% of China’s GDP growth in 2025-2026.
There are no signs of a start to fruitful negotiations between the US and China, and in our baseline, the bilateral tariffs will remain in place at least for some months.
Given that the trade war will have a significant negative effect on China’s GDP growth, China either will continue to aim for the high growth target and increase stimulus to the economy or blame the US for its challenges and accept that growth will be significantly lower in 2025. If China continues to target ambitious growth, we expect increased fiscal and monetary stimulus, including:
Another boost to fiscal spending, possibly focusing more on consumption
A couple more interest rate cuts from the People's Bank of China (PBoC)
A somewhat weaker CNY against the US dollar. We expect the moves to be gradual, with the CNY moving within the 2% trading band to avoid instability in the FX market
Large public budget surpluses and a declining debt ratio put Denmark in a good position to navigate the economy through an uncertain period. However, unexpectedly high tax payments have meant that excess liquidity in the money market has been lower than normal for some time. Financial market turmoil has meanwhile led to a weakening of the DKK.
Nordea Chief Economist: Nordics resilient amid global uncertainty
The global economy is subject to great uncertainty owing to President Trump’s tariff war with the rest of the world. We do not expect a global recession in our baseline scenario, and we believe that Europe, and in particular the Nordic region, is well positioned to weather the storm.
The global landscape has been jolted, partly due to the global trade war. This also affects Sweden, causing households and businesses to hesitate. However, the impact on growth is expected to be limited. There are conditions in place that will help to continue last year’s gradual recovery of the Swedish economy. Inflation will likely decline next year, but a stronger economic climate should reduce the Riksbank’s need to ease monetary policy.
