China’s Domestic Demand Weakness to Limit Growth to 4.1% in 2026 in World Economy News 23/01/2026 China’s economic data point to a continued two-speed economy in 2026, with strong external demand balanced against subdued domestic demand, says Fitch Ratings. We forecast these trends to lower GDP growth to 4.1%, from 5.0% in 2025. We believe domestic demand will remain constrained by sluggish consumer confidence, deflationary pressures, and investment headwinds that have broadened beyond the property-sector correction and are amplified by the local-government debt overhang. Policy efforts to reignite investment and shift towards greater consumption are likely to intensify, but on an incremental basis, providing modest support to economic activity. While China’s GDP growth in 2025 exceeded Fitch’s earlier 4.8% projection, underlying data highlight the challenge in reviving domestic demand. Several modest measures have been announced to boost domestic demand, which was flagged as the key economic priority for 2026 in December’s Central Economic Work Conference, including an extension of the trade-in programme and interest-rate subsidies on personal loans. The degree of fiscal support is a key uncertainty. We expect a largely neutral fiscal stance with a modest decline in the deficit to 7.9% of GDP in 2026 from 8.4% in 2025. However, local government infrastructure spending slowed sharply in 4Q25, suggesting a lower 2025 deficit than our forecast. The fiscal spending mix is likely to shift to more central government spending and a greater emphasis on consumption, moderately supporting growth. Consumer demand remains sluggish. Retail sales growth rose 3.7% for the full year, supported by the consumer goods trade-in programme. However, retail sales growth slowed in 2H25 on a monthly yoy basis, to just 0.9% in December as the effects of the trade-in programme ebbed. Services production appears to be a bright spot, expanding at 5.5%. Negative wealth effects from the property market downturn and a soft labour market are still weighing on household sentiment. We expect investment to remain subdued but pick up in the latter part of 2026. Fixed-asset investment (FAI) fell sharply by 15.1% yoy in December, after pronounced weakening in manufacturing and infrastructure investment in 2H25 compounded ongoing declines in real-estate investment. The fall in FAI substantially overstates the decline in investment reflected in GDP statistics, but investment has still slowed sharply. We expect the government to calibrate its anti-involution policies, focused on combating excessive competition, to ease pressures on manufacturing investment. Nevertheless, continued efforts to rein in local-government industrial subsidies and a shift towards a unified national market will weigh on near-term prospects. Public infrastructure will remain an important growth driver. Local-government bond issuance should remain buoyant, although a significant portion of funding will be allocated to debt substitution for local-government financing vehicles (LGFVs), which will limit the scope for new projects. To maintain momentum, direct investment from the central government or non-LGFV state-owned enterprises may increasingly fill gaps, reflecting the authorities’ preference for investment stability. Deflationary pressures persist amid soft domestic demand but eased modestly, with the contraction in the GDP deflator narrowing to 0.7% in 4Q25 from 1.0% in 3Q25. We expect the deflator