The news: China’s retail sales fell in May for the first time since the country emerged from COVID-19 lockdowns in December 2022, offering another sign of deep-rooted consumer pessimism.

• Sales fell 0.6% YoY, according to the National Bureau of Statistics, missing economists’ expectations for flat growth.
• The drop came despite the Labor Day holiday at the beginning of the month and higher inflation from rising energy prices.

The big picture: The decline in retail sales underscores the challenges Chinese retailers face as the country’s unresolved property crisis and highly competitive landscape diminish consumers’ ability and willingness to spend.

Retailers like JD.com and Alibaba were buoyed last year by government subsidies on appliances and other household goods. Those funds have largely run dry, and Beijing so far has shown extreme reluctance to roll out broader stimulus measures. Companies’ ability to entice price-sensitive shoppers is further constrained by rising government scrutiny of subsidies and other popular marketing tactics used to boost spending, which could hurt sales during crucial sales periods like 618 and Singles Day.

Our forecast expects China’s retail sales growth to weaken steadily over the next five years, even without accounting for any negative impact from the Iran war. We expect a 5.2% increase in retail sales this year, down from 5.7% growth in 2025, as the combination of a reduction in subsidies, more regulation, and stiff competition for shoppers’ attention slow momentum.