China retail sales drop 0.6% in first consumer contraction since Covid

China's consumer spending contracted for the first time since the pandemic in May, deepening the K-shaped divergence between a manufacturing-led export boom and a domestic economy weighed down by a property slump and cautious households.

Retail sales fell 0.6% from a year earlier, the National Bureau of Statistics said Tuesday, missing the consensus estimate for no change and marking the first decline since December 2022 when the country was still under Covid lockdowns. The reading worsened from April's 0.2% gain.

"The consumer is not participating in this recovery," said Zhang Ming, chief economist at Shanghai-based CF40. "The Labor Day holiday boosted travel volumes but per capita spending remained below last year's level, which tells you households are still repairing balance sheets rather than spending freely."

Industrial output rose 4.5% in May, topping the 4.3% forecast and rebounding from April's nearly three-year low of 4.1%, as factories powered by surging exports of renewables and AI-related equipment. But the manufacturing strength has yet to filter through to the broader economy. Urban fixed-asset investment contracted 4.1% in the first five months from a year ago, far worse than the 2% decline economists had expected and steepening from the 1.6% drop in the January-April period. Real estate investment plunged 16.2% during the same period, while infrastructure investment eked out just 0.6% growth.

The data exposes the fragility of China's K-shaped recovery, where robust manufacturing and export sectors — exports posted double-digit growth in both April and May — coexist with persistent weakness in property and consumer spending. The national unemployment rate edged down to 5.1% in May from 5.2% in April, but the improvement was driven largely by manufacturing hiring rather than service-sector job creation. Producer prices rose at their fastest pace in nearly four years in May, driven by higher commodity costs after the Iran war disrupted energy flows, yet consumer inflation remained subdued at 1.2%, signaling that upstream suppliers are absorbing cost increases rather than passing them on to end consumers.

The consumer spending contraction raises the stakes for Beijing to deliver additional stimulus. The official manufacturing PMI slipped to 50.0 in May, the threshold separating expansion from contraction, suggesting the industrial engine may also be losing momentum. With the property market showing no signs of stabilization — real estate investment has now contracted for more than three consecutive years — and households reluctant to spend, pressure is mounting on policymakers to deploy more aggressive fiscal measures. The last time retail sales contracted, in December 2022, Beijing responded with a broad reopening and a wave of property-sector support within three months. Whether a similar policy response materializes this time will depend on whether the leadership views the consumer weakness as cyclical or structural.

This article is for informational purposes only and does not constitute investment advice.