China’s weak domestic demand, worse-than-expected unemployment threaten growth

China’s slowing retail sales growth and fixed-asset investment and rising unemployment rate indicated a slowdown in domestic demand, fueling expectations that Beijing may have to introduce additional fiscal and monetary measures to support economic growth.

China’s retail sales grew 0.4% year-on-year in August, short of estimates, while falling compared with the previous month. Fixed-asset investment declined 7.2% at the same time, worse than expected.

China’s unemployment rate came in higher than expected at 5.3% in August. The country’s industrial production rose 5.2%.

The loss of momentum, especially in consumption and investment, could complicate the path Beijing will have to take to meet its growth targets.

Lynn Song, chief China economist at ING Group, said in a recent ING Think article that consumption and investment remained low due to weak domestic demand in the country. He expected gross domestic product (GDP) growth to likely stagnate in the third quarter and said the 4.6% growth forecast for 2026 may have to be revised downward.

Song said positive developments in industrial activity were driven by external demand, while China’s improvements in its tech and industrial sectors continued to support growth.

He noted that sectors focused on high tech and external demand continue to perform well, while most other categories continue to underperform.

“Auto sales were the biggest drag on retail sales, down 18.5% YoY,” he said. “Despite strong exports, China has been both the largest producer and the largest consumer of electric vehicles, and the drop in domestic demand has weighed on the auto sector this year.”

He noted that furniture sales declined 7.9%, but household appliance sales saw their first positive growth since September 2025, rising 2.3% on an annual basis.

Gold and jewelry sales fell 17.5% year-on-year despite the rebound in gold in August, dropping to their lowest level in the past four months.

He mentioned that recent measures taken to stimulate consumption include interest rate subsidies on consumer loans, which are expected to have a modest impact on overall consumption growth.

“Moving forward, as the drag from the trade-in policy weakens, we may see some stabilization in retail sales, but a more significant turnaround will likely require additional support,” he added.