China’s economy grew by 5.4% in the first quarter compared to last year, which beat expectations thanks to government stimulus that helped the retail and housing markets, according to analysts at Société Générale. But they warned this growth may not last, especially with new U.S. tariffs likely to slow things down. One warning sign is that China’s GDP deflator, which is a measure of economy-wide prices, fell by 0.8% over the past year as it deepened a two-year deflation trend. Albert Edwards, the bank’s global strategist, said that this is a dangerous pattern similar to Japan’s long period of economic stagnation.
Edwards called China’s mix of falling prices and high debt “toxic,” especially as Chinese manufacturers face too much capacity and not enough buyers. He said this could push the economy toward a deeper crisis, and that bond markets are already reacting with falling yields as investors prepare for more deflation. The note warned that U.S. tariffs could speed up this downward pressure and make the situation even more difficult for China. At the same time, China’s troubles may actually help cool inflation in the U.S. by pushing down import prices.
Société Générale said import costs from China are dropping further into deflation, which has helped explain the recent weakness in U.S. inflation reports. Edwards pointed out that U.S. companies, especially in tech, are enjoying record-high profit margins and could absorb tariff costs without raising prices. But if those margins shrink, Trump could use the FTC to block price increases and create trouble for stocks even if bonds benefit. As a result, the firm warned that tariffs might not lead to higher consumer prices, and instead, growing deflation risks could catch markets by surprise.
Is SPY a Buy Right Now?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on the SPDR S&P 500 ETF Trust (SPY) based on 410 Buys, 87 Holds, and seven Sells assigned in the past three months, as indicated by the graphic below. Furthermore, the average SPY price target of $682.06 per share implies 28.5% upside potential.
