China Retail Sales in May Fall For the First Time in Three Years

China‘s economy showed strain in May as retail sales unexpectedly contracted for the first time in more than three years, even as exports and industrial production continue to benefit from global demand for technology products.

Data released Tuesday by China’s National Bureau of Statistics showed that retail sales, a key gauge of consumer spending, fell 0.6% in May from a year earlier, reversing April’s modest 0.2% increase and marking the first decline since December 2022. The result was weaker than economists’ expectations for flat growth.

At the same time, industrial output rose 4.5% year over year in May, accelerating from April’s 4.1% pace and beating market forecasts. Much of that growth was driven by high-tech manufacturing, which surged 15.1%, supported by strong global demand for artificial intelligence-related products and other advanced technologies.

“Several divides characterized the economy in May,” Xu Tianchen, senior economist at the Economist Intelligence Unit, told Reuters, pointing to gaps between domestic and external demand, as well as between high-tech industries and traditional sectors.

The weakness was especially visible in China’s auto market, where domestic vehicle sales declined for an eighth consecutive month. Consumer spending during the Labor Day holiday also failed to meet expectations, suggesting government stimulus measures and trade-in incentives are losing momentum.

Investment data added to concerns about the health of the world’s second-largest economy. Fixed-asset investment contracted 4.1% during the first five months of the year, a sharp deterioration from the 1.6% decline recorded between January and April.

Meanwhile, the property sector remains a major drag on growth. Real estate investment plunged 16.2% in the January-May period, while new home prices fell 0.2% month-over-month in May, a faster decline than the previous month. Sales, construction activity, and developer financing all continued to weaken despite targeted support measures from local governments.

The housing downturn continues to weigh heavily on household wealth and consumer sentiment, limiting Beijing’s efforts to transition toward a more consumption-driven growth model. China’s economy expanded 5% in the first quarter, meeting the upper end of the government’s annual growth target range of 4.5% to 5%.

Adding to policymakers’ concerns, China faces mounting labor-market pressures this summer as a record 12.7 million university graduates enter the workforce. While the urban unemployment rate edged down to 5.1% in May from 5.2% in April, analysts warn that slowing consumption and increased adoption of artificial intelligence technologies could create additional challenges for job seekers. For now, exports remain a bright spot. Chinese exports surged 19.4% in May, helping manufacturers offset weakness at home.