Is the ‘world’s factory’ losing its edge?

Data Snapshot UBS forecasts a challenging road ahead for China’s economy as external pressures like rising U.S. tariffs and weakening global demand weigh on growth. The forecast highlights a gradual decline in GDP growth, with projections falling from 4.5% in 2024 to 4.0% in 2025, and further slowing to 3% in 2026. This slowdown reflects the combined impact of escalating U.S. tariffs on Chinese exports and weakening global demand. Meanwhile, inflationary pressures are expected to reverse into deflation, with consumer price index (CPI) inflation projected to fall from 0.5% in 2024 to 0.1% in 2025, eventually turning negative at -0.2% in 2026. To counter these challenges, China is likely to deploy aggressive fiscal measures. UBS anticipates increased issuance of special treasury bonds, reaching RMB 2 trillion ($273 billion) in 2025, alongside special local government bond issuances totaling RMB 4.5 trillion ($614 billion). Interest rate cuts, ranging between 30 and 40 basis points in 2025 and a further 20 to 30 basis points in 2026, are expected to support infrastructure investments and provide relief to local governments. However, the forecast also underscores the enduring pressure on the property market, which is likely to experience only a gradual recovery. Analysis The UBS projections underscore the delicate balance needed to navigate a more hostile trade environment, weakening domestic consumption, and a faltering property sector. The planned U.S. tariff hikes — set to increase by 60% on approximately three-quarters of imports from China — represent a critical external shock. These measures are projected to reduce GDP growth by over 150 basis points by 2026, with the impact on corporate capital expenditure and export manufacturing becoming evident as early as 2025. Deflationary pressures add another layer of complexity. A CPI forecast of -0.2% in 2026 suggests a prolonged period of economic stagnation, driven by falling consumer demand and lower export prices. Deflation risks are particularly concerning as they increase the real value of debt burdens, which could exacerbate financial pressures on local governments and the broader economy. While the anticipated fiscal and monetary policy interventions may provide some relief, the effectiveness of these measures will depend on their ability to stimulate confidence and consumption in a challenging global environment. The property market, a cornerstone of China’s economic growth, is expected to recover slowly. UBS predicts that property sales will stabilize in the first half of 2026, with new construction resuming mid-year. However, the ongoing tariff hikes and broader economic uncertainties could delay a full recovery. The projected declines of 5 to 10 percent in sales and 10 to 15 percent in new starts for 2025 highlight the sector’s vulnerability. Tier-one cities may experience a quicker rebound, but lower-tier markets will likely face prolonged difficulties. Despite these pressures, China’s government has significant policy tools at its disposal, including the ability to implement structural reforms and direct support toward household consumption. Its focus on stabilizing the property market, modernizing infrastructure, and addressing local government debt suggests a comprehensive approach to mitigating risks. That said, uncertainties remain, particularly regarding the timing and scale of these interventions, as well as the potential for further geopolitical disruptions, such as escalating U.S. technology restrictions. The Jing Daily Data Snapshot presents a swift take and analysis on the latest data from the leading research firms in the Chinese luxury and lifestyle markets.

Is the ‘world’s factory’ losing its edge?

On this page

Published December 07, 2024

Sectors

Insights

Company

Is the ‘world’s factory’ losing its edge?