BEIJING, Aug 17 (Reuters) - China's economy lost momentum at the start of the second half, with industrial output and retail sales slowing as extreme weather disruptions and persistently weak domestic demand renew pressure on policymakers to step up stimulus.
The disappointing data, following second-quarter growth that cooled to a three-and-a-half-year low, highlights China's continued dependence on exports to offset sluggish consumption and investment even as it confronts headwinds from U.S. tariffs
and the conflict in the Middle East.
Factory output grew 4.5% from a year earlier last month, compared with 5.3% in June, data from the National Bureau of Statistics (NBS) showed on Monday, missing a Reuters poll forecast for 4.8% growth.
STIMULUS PRESSURE BUILDS WITH INVESTMENT IN FOCUS
"The poor performance is due in part to ineffective use of the policy measures in hand. Fiscal spending has lagged behind, for example," said Xu Tianchen, senior economist at the Economist Intelligence Unit. "It's a call for officials to be bolder about spending what they have."
"Attention should be paid to investment, whose sharp decline is by no means acceptable to Beijing," he added.
Fixed-asset investment contracted 6.7% in the first seven months of 2026, compared with an expected 6% decline. It fell 5.7% in the January-June period.
Fu Linghui, an NBS spokesperson, told a press conference that officials would step up counter-cyclical policy adjustments to bolster domestic demand.
Getting China's roughly 1.4 billion population spending again will not be easy while the country's property sector remains in a slump, with new home prices in July down 3.2% from a year earlier and 0.1% from June.
Economists estimate that about 52% of household wealth is tied up in real estate, a share that has declined in recent years as the protracted property crisis has pushed investors toward gold and other assets.
Retail sales grew 0.6%, slowing from a 1% rise in June despite summer holiday tourism spending. Analysts had forecast 1.5% growth.
The drop was "partly just payback for the consumer goods trade-in scheme, which boosted sales a year ago by bringing forward demand," said Julian Evans-Pritchard, head of China economics at Capital Economics.
Analysts at Citi noted that the pace of subsidy distribution had weakened again in July, with daily average sales dropping to 6.3 billion yuan ($934.8 million) from 9 billion yuan in June.
EXTREME WEATHER BRINGS REAL HEADWINDS
Policymakers are also having to contend with factors beyond their control, such as the weather.
Industrial output and retail sales were likely hampered by unusually active extreme weather last month, with three typhoons making landfall and millions of people relocated across China's eastern and southern manufacturing hubs.
Auto sales declined for a 10th straight month in July, albeit at a slower pace, contrasting with strong external demand as automakers eye overseas expansion to offset domestic weakness.
Economic indicators released so far have pointed to a weak start to the third quarter. The official manufacturing purchasing managers' index unexpectedly slipped into contraction, while export and import growth both moderated from June, though they remained in double-digit territory.
Still, Fu was confident the recent weather would not rain on policymakers' ambitions to see the $20 trillion economy grow by between 4.5% and 5%, stating that the foundation remained solid.
Robust exports, buoyed by the global AI infrastructure buildout, have continued to support China's factories. But weak domestic demand remains a major risk that leaves the economy vulnerable to shocks such as weather disruptions and trade barriers.
China logged another month of more than $100 billion in trade surplus last month, with the full-year total on track to top $1 trillion for a second year.
That has continued to unnerve trading partners, with the European Union weighing tougher measures to curb its trade deficit with China, and the U.S. announcing new tariffs on Chinese goods.
China's leaders pledged to shore up the slowing economy by accelerating fiscal spending and introducing new policies "in a timely manner", but have so far stopped short of signalling major new stimulus measures.
"The emerging pattern is one of selective strength amid broad softness," said Yuhan Zhang, principal economist at The Conference Board's China Center.
"The question is, therefore, not simply whether China can sustain growth, but whether policy-supported pockets of activity can eventually generate a broader recovery in household spending and private investment."
($1 = 6.7392 Chinese yuan)
(Reporting by Kevin Yao, Joe Cash and Ethan Wang; Editing by Jacqueline Wong)
