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Economic activity data released by China this week for the first quarter of 2025 makes a mockery of Donald Trump and his administration. At a time when the United States and China are locked in an intense and multifaceted trade war and the Fed is warning that a US recession is becoming increasingly likely, China has released robust growth figures at odds with the mood of excitement that has reigned since Trump announced his trade tariffs.

A strong start to the year…

First-quarter growth came in at 5.4%, ahead of consensus expectations. This growth was driven by industrial production, which quickened sharply in March, up 7.7% (compared with 5.9% in the January-February period), buoyed in particular by the solar panel, electrical appliances and components, and transport equipment sectors.

However, the main positive surprise was retail sales, which were up 5.9% year on year in March, compared with 4% in January-February. Boosted by a programme of state subsidies that has been doubled from RMB 150 billion to RMB 300 billion (around $40 billion) for 2025, purchases of phones, TVs and household appliances experienced double-digit growth.

Rightly anticipating a deterioration in tariff conditions, Chinese exporters increased their outbound shipments, particularly to the US. Exports surged 12.4% in March and were buoyant across all geographical regions, particularly the ASEAN region (up 11.6%) and the US (up 9.1%). Unsurprisingly, the top exports were consumer goods (textiles, shoes, furniture, phones) and auto parts. China's trade surplus was in excess of $100 billion in March alone and is approaching $1.1 trillion over 12 months.

…but deeper concerns remain unresolved

Whatever happens next in its trade clash with the US, this good news puts China slightly ahead of its 5% growth target for 2025. However, it masks a more nuanced structural picture, with persistent deflationary pressures reflecting a lack of domestic momentum that the consumer goods subsidy programme alone will not be able to make up for.

The first thing to point out is that China is not out of the woods yet when it comes to deflation. The consumer price index was in negative territory in March for the second month running (down 0.7% in March after falling 0.1% in February). This trajectory reflects still constrained domestic demand and raises fears of a powerful deadweight effect on households which, while benefiting from state subsidies, have no intention of significantly changing their trade-offs between saving, spending and paying off debts.

Meanwhile, producers continue to wage a ferocious price war to protect their domestic and foreign market share. The decline in commodity prices over the past week in the wake of Trump's tariff announcements could continue to support this trend while bringing some relief to businesses whose margins have fallen sharply over the past three years.

Secondly, the crisis in the real estate market is not yet over and the sector continues to give off mixed signals. Destocking appears to be ongoing and the difficulties faced by real estate developers mean the number of new projects getting off the ground (as measured by investment and building permits) is still well down. Although prices have begun to stabilise since the end of last year, they are still falling, and the situation continues to differ between major cities (Tier 1 and Tier 2) and those on the periphery (Tier 3 and below).

The situation in the real estate market is fuelling a deflationary environment in China. The authorities have now recognised this state of affairs.

Lastly, while exports had an exceptional month, imports fell sharply in March (down 4.3% YoY) as a result of a commodity price effect but also because Chinese producers are anticipating a decline in demand. This is also the reason for the trade surplus seen in March.

Into the great unknown: the US-China trade war

Having tried the approach of appeasement and negotiation, but with the US showing no sign that it is interested in appeasement or openness, China finally responded forcefully to US trade tariffs.

For the time being, a 125% tariff applies to all imports from the US (compared with a minimum tariff of 145% on imports into the US from China). China has also announced fresh restrictions on exports of some critical metals and rare-earth elements (samarium, gadolinium, terbium, dysprosium, lutetium, scandium and yttrium), launched an anti-dumping investigation (medical CT tubes) and added more US companies to its Unreliable Entities List, severely limiting their scope to do business in China or with Chinese counterparties. China also appears to have withdrawn an order with Boeing and to have already begun diversifying its supplies of agricultural products (beef, soymeal and maize in particular) to include other suppliers such as Brazil and Austria.

With China the only country still targeted by import tariffs since Trump announced a 90-day suspension of his “reciprocal tariffs”, President Xi Jinping also embarked on a diplomatic tour, visiting partners and allies in the region (Cambodia, Vietnam and Malaysia). All three countries – especially Vietnam, whose exports to the US make up 25% of its GDP – would be hit very hard if Trump's reciprocal tariffs were to come into force, with tariffs of 49%, 46% and 24% respectively.

With that in mind, China is keen to convince them to join it in presenting a united front to the US. That puts these three countries in a tricky position: for the time being, they have positioned themselves as negotiators, proposing to lower their own import tariffs on US products and increase their imports from the US in some strategic sectors such as aerospace and liquefied natural gas.

China currently finds itself in the very uncomfortable position of being isolated and struggling to find other countries willing to stand up to the US. As each country pursues its own agenda, the worst-case scenario would be for Chinese products to be hit with very high import tariffs while goods from the rest of the world escaped such treatment. This scenario would force Chinese companies to work harder to circumvent tariffs, with far-reaching consequences for domestic employment and production. It would also prompt the rest of the world (apart from the US) to take action to protect itself against a tidal wave of surplus Chinese products as the US market closed to Chinese imports.

Try as it might try to position itself as a defender of the multilateral system and WTO rules, after two decades of China massively subsidising domestic industry and flouting intellectual property rights, the rest of the world has learned not to trust it. Being anti-American does not necessarily make you pro-China. And, with international firms finding it increasingly difficult to penetrate China's domestic market, the odds are that they – and their home countries – will continue to favour the US market.

Jittery markets have responded with relief to the few concessions made by the Trump administration, which, under pressure from American firms like Apple, has suspended import tariffs on tech products (computers, phones, tablets, etc.), which account for around 20% of Chinese exports to the US, worth $100 billion a year. The release of China's growth figures, on the other hand, has had no significant impact.

Another question will be how to understand the strategy pursued by China's central bank, which in recent weeks has allowed the yuan exchange rate to devalue slightly. With currency reserves in excess of $3.5 trillion, China could easily afford to defend its currency if necessary. But allowing the yuan to depreciate sharply would surely be seen by the Trump administration – which has regularly accused China of manipulating its currency by undervaluing it – as a further provocation. Other countries, including in particular emerging countries, which rely on price competitiveness (rather than competing on factors other than price) to boost their exports, would probably be quick to condemn such practices, making it harder for China to build a political alliance in opposition to US decisions. It is therefore likely that China will opt to allow the yuan to depreciate very slightly while making every effort to stabilise it at around the pivotal level of USD/CNY 7.3. After all, if US import tariffs were to remain very
high (above the 60% originally announced by Trump during his election campaign, for which China undoubtedly prepared itself), devaluation would be a very inefficient way for China to try to maintain its US market share.

Our opinion

Any good news is welcome in the current environment and, by maintaining its ambitious 5% growth trajectory, China has gained some ammunition for the trade war that lies ahead. However, we must not allow the March and Q1 data to blind us to problems – recent or otherwise – in the Chinese economy. Persistent deflation underscores just how much work China still has to do to revive consumer spending and suggests that the latter could fall again as soon as the subsidy programme expires. With the stock of vacant homes slowly declining, the real estate crisis that is fuelling this deflation appears to be far from over. Lastly, China is locked in a tug of war with the US, the outcome of which is highly uncertain. Whether it can succeed in rallying allies to stand with it will mainly depend on the US attitude towards the rest of the world. Its isolation – perhaps the Trump administration's primary goal – would be difficult to manage, though its dominance in logistics and its status as a major industrial power mean it still has some aces up its sleeve in this great game of trading poker.

We expect GDP growth of 0.3% quarter-on-quarter in the first quarter of 2025 after +0.1% in the fourth quarter of 2024. But the recently released monthly GDP data for February suggest upside risks to our forecast. Growth in the first quarter could be close to 0.6% in quarterly variation.

Activity is expected to slow down in the second quarter. We expect growth of around 0.2% quarter-on-quarter due to increased global uncertainty, tighter financial market conditions following the imposition of tariffs by the White House, but also the rise in employer National Insurance contributions (NICs) by the UK government and in regulated energy prices in April.

Annual GDP growth is revised downwards to 0.9% in 2025 and 1.4% in 2026 (compared to 1.1% and 1.6% expected respectively three months ago), forecasts surrounded by a high degree of uncertainty due to the uncertain impact of tariffs. We have revised upwards our unemployment rate forecast to 4.7% in the second half of 2025 and in 2026, from 4.4% in the fourth quarter of 2024.

US tariffs on goods imported from the UK could subtract from 0.1% to 0.6% of UK real GDP, or even more in the event of retaliation or announcements of additional tariffs (notably those expected on pharmaceutical products); in the worst-case scenario imagined by the OBR, tariffs can subtract up to 1% of UK GDP in 2026-27. Such an impact is not factored into our forecasts. On the labour market, employment expectations were already deteriorating due to the rise in labour costs in April (employers NICs and the national living wage) and several tens of thousands of jobs could be lost as a result of the tariffs. 

With the government having almost no room for manoeuvre, any support for the economy will have to be provided by a more aggressive easing of monetary policy. We expect the BoE to cut rates by 25 basis points per quarter this year (in May, August and November 2025) in our central scenario, which would bring the Bank rate to 3.75% at the end of the year (from 4.5% today). However, the BoE could accelerate its pace of rate cuts.

The Spanish economy began 2025 with greater momentum than its European partners. In 2024, GDP grew by 3.2%, increasing by 0.8% in Q4, supported by consumption and investment. The fundamentals are solid: a current account surplus for the 13th year, private debt limited to 125.1% of GDP (vs. 153.5% in the eurozone) and public debt down to 101.8%. The net international investment position also improved. This strong performance served to increase the growth forecast to 2.5% in 2025. The recovery remains concentrated on domestic demand. Lower interest rates, disinflation (inflation is expected to be 2.5% in 2025) and a high savings rate should boost consumption. Employment is set to increase by 2% and unemployment is forecast to fall to 10.9%.
Despite this favourable environment, foreign trade is expected to have a negative impact, due to dynamic imports and slowing exports. Geopolitical and trade tensions (US-EU) represent a significant risk. The full deployment of NGEU funds will be important in maintaining the momentum of private investment.

A transatlantic rift has opened. It had been incorporated into our forecast last December in the form of a downward revision to growth to take account of the negative impact of the rise in tariffs on steel and aluminium to 25%, as well as an alignment of the average US tariff with that of the EU. into a downward revision to growth of 0.2 percentage points (pp) as a direct result of lower exports and a further 0.1 pp as a result of increasing uncertainty over investment decisions.

The increase in customs duties on vehicles to 25% has been integrated into this March 2025 scenario; this increase would result in an 8% drop in automotive production in Western Europe with a drain on Eurozone growth of -0.1 pp in 2025. But Europe has also committed more spending on infrastructure investment and on the military, the impact of which offsets the negative effect of US policies, bringing the zone's growth to 1% in 2025 and then to 1.5% in 2026.

The tariffs introduced on 2 April (Libération Day) are therefore not included in our central scenario, but their impact has been quantified in a risk scenario. Assuming no symmetric retaliatory measures from the EU, this scenario introduces a further 0.1 pp decline in GDP growth in 2025, 0.3 pp in 2026 and 0.2 pp in 2027 for the Eurozone.

The contours of the "new world" are clearly taking shape: domination by force at the expense of the rule of law and multilateral institutions, trade wars replacing the now-defunct globalisation, fragmentation/regionalisa¬tion of trade flows. The paths that lead to this new territory, the paths that usually enable us to draw up economic scenarios over a shorter horizon, are chaotic. In particular, they are distorted by US trade obsessions: tariffs so high that they almost look like threats, dates for the implementation of sanctions announced and then postponed, hopes for negotiations, expected retaliation from targeted countries, and so on. The versatility and excessiveness of the US administration’s threats are such that their victims move from uncertainty, which is already highly penalising, to a state of stupefaction, obliterating their ability to think, anticipate and react.

Stupefaction is precisely what Donald Trump's tariff announcements on “Liberation Day” produced. Firstly, because the tariffs – which Trump claims are sucking the life out of the US economy, are perplexing when compared with what is actually applied. Secondly, because the tariffs announced (including the strangely calculated reciprocal tariffs) exceed what had been anticipated and are likely to be further tightened. Finally, because we had just completed our quarterly scenario…

The scenario's figures may be amended once the definitive trade provisions (US measures and retaliation by other major countries) have been decided, but its credo remains that the cost of protectionism is already high and could get even higher. Its first extra cost, in the form of additional inflation, justifies the drop in US growth forecast for 2025. 
In the US, since the beginning of the year, the market has radically altered its stance, with the strong belief in ‘American exceptionalism’ giving way to heightened fears about growth. Back in December, our scenario was based on a policy timeline conducive to a US slowdown by mid-2025. It still assumes that punitive policies (tariffs and immigration restrictions, implemented by executive order) will be applied before pro-growth measures such as tax cuts, which require Congressional approval. In essence, the overall policy mix is tilted slightly towards growth. More precisely, as it stands, before the full application of the 2 April announcements, our scenario envisages growth of 1.7% in 2025, a clear slowdown from the 2.8% posted in 2024 and a slight downward revision of our December 2024 forecast (1.9%). This slowdown is accompanied by inflation close to 3% at the end of 2025.

In response to the declaration of trade war, Europe has not disarmed. A transatlantic rift has opened up. This rift had already been incorporated in the form of a double negative impact: higher tariffs  and increased uncertainty, taking a total of 0.3ppt off the Eurozone’s growth rate. The latest round of tariffs included in the scenario (25% tariffs on automobiles) takes off a further 0.1ppt. But the promising European response in the form of infrastructure investment and military spending, and above all the German tax package, would bring additional growth to the Eurozone, which is currently expected to reach 1.0% in 2025 and 1.5% in 2026 (compared with 1.2% previously). The intensification of the trade confrontation with the US, not included in our central scenario, poses a downside risk on both sides of the Atlantic. 

After “Liberation Day”, the Fed will be faced with an even more perilous balancing act. It will have to combine support for weakened growth, while rising inflation is the first risk to the US economy brought on by tariffs. The Fed could end up relaunching its rate-cutting process, but with limited easing, with two further 25bp cuts in June and September, before entering a prolonged pause with the Fed Funds rate upper bound at 4.0%. However, the risks are tilted to the upside: it would be no surprise to see the Fed cut rates less than twice in 2025.

As for the ECB, the depressive impact of US tariffs is countered by the prospect of stronger growth due to the German package. Against a backdrop of immense uncertainty, the ECB is obliged to be cautious: with a certain amount of audacity, our current scenario only includes one 25bp cut in June followed by a long pause, with a deposit rate at 2.25%, and the maintenance of quantitative tightening. Unlike the US, the risk is rather bearish, with the possibility of a cut in April: this bias is maintained.
Interest rates are supposed to bet early on the promise of growth: an assumption that should be maintained. While monetary easing appears to be nearing an end, the second phase of Trump's economic policy, presumed to be favourable to growth, and hopes of European momentum boosted by German public spending, remain conducive to a gradual rise in interest rates.

In the US, in the absence of any risk of a hard landing, it is unlikely that the 10Y Treasury yield will fall below 4.0% for long. If we base our interest rate forecasts on the monetary scenario and the tempo of economic policy measures, the 10Y UST would fall until mid-year, before firming up in H225 (to 4.45% by the end of 2025) and in 2026 (to 4.75% by the end of 2026).  In the Eurozone, Germany's change in fiscal policy means that we can expect the German 10Y Bund yield to reach 3% by the end of 2025 (ie, almost 20bp above the swap of the same maturity) and major countries to tighten Bund spreads. France, Italy and Spain would offer spreads of 60bp, 105bp and 55bp respectively above the Bund at the end of 2025.

Finally, on the USD front, the “Trump trades” did not last long. While Trump's election was favourable to the USD’s appreciation, it all went south after Inauguration Day: the speed of its depreciation since the start of the year has come as a surprise. The USD is likely to remain under pressure, particularly if concerns over the "Mar-a-Lago accord" are revived: the EUR could thus appreciate and peak at USD1.12 by the end of 2025.

Completed on April 3 2025
The main assumptions of the scenario and associated pricing, including growth and inflation, were finalized on March 31, 2025.

There can no longer be any doubt: the Chinese authorities have changed their rhetoric. Although this change has yet to filter through into meaningful measures of any significance, it has already succeeded in making markets – which had given up hope of a stimulus plan they had been waiting for since the end of the Covid pandemic – sit up and take notice. Whereas Chinese public policy has traditionally targeted supply, notably through various forms of support for businesses (grants, tax credits, access to liquidity), and Xi Jinping used to regularly slam “welfare societies” where the welfare state and Keynesian mechanisms play a role, this shift in tone means there is now more emphasis on domestic consumption and demand.

Last week, the Chinese authorities announced a plan to “vigorously boost consumption” – something they had already made a priority during the parliamentary sessions in early March, when the ambitious 2025 growth target of 5% was confirmed. 

Markets have enthusiastically welcomed this new plan, with Chinese stocks – chiefly in the tech sector – still buoyed by the “DeepSeek effect”. With support for the private sector in evidence at the highest levels of government, notably with Jack Ma restored to favour and received by Xi Jinping in person, markets want to believe that China has put economic growth back at the top of its priority list. 

Still a long way to go

If we take a closer look, however, we can see that this change in rhetoric also reflects real and justified concerns on the part of the authorities, which are well aware that the consumer confidence crisis is deep and lasting and that hardening external conditions – starting with higher US trade tariffs – risk jamming up China’s most powerful growth engine. 

However much the authorities might have asserted their desire since 2015 to rebalance the growth model away from investment and towards consumption, with the aim of also reducing the country’s reliance on the outside world, this rhetoric has not really been reflected in public policy. In fact, investment as a percentage of GDP even rose after Covid. This time around, the government appears keen to explore more specific ways to revive still sluggish consumer spending. 

Firstly, the government has extended its consumer goods trade-in programme (covering phones, TVs and small appliances), for which a budget of 300 billion yuan (around $40 billion) has been set aside. Secondly, the minimum wage has been raised following the increase in civil service wages in December and social security coverage has been expanded to cover some insecure jobs, including in particular delivery workers and migrant workers. Lastly, the government has announced childcare subsidies with the aim of also supporting a rapidly shrinking population: with the fertility rate averaging around 1.1 children per woman, China’s population declined for the third year running in 2024. 

But will this be enough to restore to Chinese households the desire and the confidence they need to spend? The Covid crisis seems to have hit consumers so hard that nothing could be less certain. In January and February, retail sales were up 4% year on year – a thoroughly respectable performance, slightly ahead of consensus expectations. But that 4% came at a high fiscal and monetary cost – the cost of state subsidies to encourage households to buy consumer goods and, above all, an across-the-board fall in prices reflecting a return to deflation (with prices down 0.7% year on year in February). This is a steep price to pay to see consumption grow slower than overall economic growth, raising questions as to the effectiveness and sustainability of these measures. In 2024, 25% of Chinese companies reported losses. Without government support, and with margins squeezed and a price war raging, the correction in corporate earnings could be even more severe.

Chinese households are still worried: the real estate sector has shown no real sign of recovery and new home construction volumes even began to fall again in February. With the bulk of Chinese assets invested in real estate, a modest improvement in stock valuations is not going to be enough to convince people to invest their savings in markets where financial savings solutions are still comparatively undeveloped relative to the pool of potential investors. 

Here again, the government has come to the sector’s rescue. With private developers swept away by the crisis, public sector stakeholders have never played such a key role in transactions, as either buyers or project developers. Over 50% of private developers have gone bust since 2021, leaving local authorities and state-owned enterprises in the front line to take over projects, buy vacant or unfinished properties and oversee a drop in prices, which official statistics say remain stubbornly high. 

The great unknown: America

On top of all this, there are now worries over the American position on trade tariffs. The US administration has already implemented two 10% hikes, in February and March. China has responded cautiously, targeting increases of between 10% and 15% on certain categories of goods (mainly agricultural products and energy). And, with the US president having already pointed his finger at the weak yuan, calling it “unfair” to the United States, Beijing is also taking care to ensure the stability of its currency by limiting its depreciation. This could perhaps leave the door open to potential negotiations, though Donald Trump appears to be in no hurry to negotiate: while he has expressed a desire to meet with his Chinese counterpart in the “not too distant future”, a specific date has yet to be put forward. And, while China is not the country most affected by reciprocal tariff moves due to be outlined in early April, it could find itself the target of fresh tariffs: during the presidential election campaign, Trump promised 60% tariffs on all US imports of Chinese goods. 

Chinese exports were down 3% year on year in February. This is not yet a major concern: Chinese exports to the US soared in the run-up to the end of 2024 in anticipation of higher tariffs. Seasonal effects to do with the exact timing of the Chinese New Year (which sometimes falls entirely in February and sometimes straddles January and February) may also be a factor. 

The fact remains that Chinese exporters are bracing themselves for some tough months ahead, especially bearing in mind that the measures announced by the US could also trigger indirect effects by prompting other countries to erect tariff and/or non-tariff barriers to protect themselves against a wave of Chinese products. While China has said it wants to reduce overcapacity in some sectors, notably steel and aluminium, its room for manoeuvre is limited: it has its own domestic constraints to manage in terms of employment and social stability. 

The change in rhetoric indicates that the Chinese authorities are taking seriously signs that their model is running out of steam as it reaches limits well known to emerging economies that have paid too little attention to balancing and distributing the benefits of growth to create a consumer middle class that can support demand without external help. It remains to be seen precisely what measures and resources will be put on the table to restart the engine of consumption, and how much capacity local governments – unquestionably in the front line in this area – will have to implement those measures at a time when they are already having to manage another legacy of this unbalanced growth model: the deleveraging and rationalisation of some 12,000 financial platforms used to finance infrastructure programmes.