China’s economy weakened sharply in May as retail sales fell for the first time in three years

China’s retail sales fell for the first time in more than three years in May while investment in cities contracted more than expected, putting pressure on Beijing to unleash a meaningful stimulus to stimulate consumption.

Retail sales, a measure of consumption, fell in May for the first time since December 2022, down 0.6% from a year earlier, according to the National Bureau of Statistics on Tuesday. The Labor Day holiday in early May failed to offset weak consumer spending as Beijing scaled back trade subsidies earlier this year.

The drop in sales was a surprise as economists polled by Reuters had forecast slower growth. Fu Linghui, the spokesperson of this office, highlighted the combined sales of goods and services had a jump of 2.8% in five months.

Investment in China’s urban assets, including real estate and infrastructure, fell 4.1% this year as of the end of May from a year earlier, compared with an estimated 2% decline and up from a 1.6% decline in the first four months of this year.

Real estate is a drag on investment, with inflows down 16.2% in the January to May period, while fixed investment production contracted for the first time since December 2020, wind data showed. Investment in infrastructure grew by 0.6% compared to last year.

Industrial production was the bright spot, rising 4.5% in May to the highest growth rate of 4.3% and rebounding from April’s nearly three-year low of 4.1%.

“The domestic imbalance between strong supply and weak demand is great,” said the statistics office, calling for the development of new technologies and greater support for employment to achieve “appropriate economic growth.”

The economy has shown signs of faltering following a strong first quarter. Growth slowed in April, with industrial output and retail sales recording their weakest gains in years. In May, the official gauge of manufacturing activity fell to 50, the threshold that separates expansion from contraction.

During the extended holiday period at the beginning of May, while it boosted travel and dining activity, per capita spending lagged behind the same period in 2025, as consumers became more price conscious.

“The weak sales data is putting pressure on the government to consider policy measures to stabilize consumption,” said Zhiwei Zhang, president and economist at Pinpoint Asset Management, expecting a “good” policy adjustment to come in July following the release of second-quarter GDP data.

The national unemployment rate fell to 5.1% in May, compared to 5.2% in April.

China’s economy has developed into what economists have called a “K-shaped” growth model, with strong manufacturing and export sectors against continued weakness in consumer and consumer spending.

The country’s exports remained the highlight with double-digit growth in April and May, as increased renewables and AI-related demand largely offset the drag from Middle East conflicts.

However, the Iran war’s disruption to electricity flows has also raised commodity costs, helping to ease the inflationary pressures that have plagued China’s economy for years.

China’s producer price inflation rose to the fastest pace in nearly four years in May, but the gains have not caught up with consumer spending, which grew by a meager 1.2%, as upstream suppliers absorb higher costs amid weak demand.