China's surprise trade truce with the U.S. has spurred tentative U-turns on the outlook for the world's second-largest economy, with investment banks cautiously walking back growth downgrades made just weeks ago.

The pause on many of the tit-for-tat tariffs has prompted global forecasters to rethink how much China's economy will slow this year. Though the detente announced Monday is temporary, it has tempered pessimism that a deal with the U.S. was unfeasible.

Now anticipating a smaller shock to Chinese exports, economists at UBS on Tuesday raised their forecast for China's real gross domestic product growth for the year. They now see the economy expanding 3.7% to 4.0%, up from the 3.4% predicted a month ago but still far from Beijing's target of around 5%.

Goldman Sachs economists made a similar upgrade, lifting their 2025 growth forecast to 4.6% from 4.0% on the larger-than-expected tariff rollback. The bank told clients that further tariff cuts, more significant trade re-routing to avoid U.S. tariffs, and more aggressive policy easing by Beijing could prompt another upward revision.

Export data for April, before the truce was struck, also showed surprising resilience in China's outbound shipments.

"Reports of the death of Chinese exports have been greatly exaggerated," ING economist Lynn Song said at the time.

After news of the tariff pause, ING reverted its growth forecast for the year to 4.7%, seeing further possible upside if a bilateral agreement is reached within the 90-day period.

Economists at Morgan Stanley and ANZ didn't change their annual forecasts but said they expect growth to improve over the next few months as the tariff suspension will likely spur more front-loading of shipments and production.

MS said that China's second-quarter GDP growth could exceed its current estimate of 4.5%, with growth in the third quarter possibly coming in above the projected pace of around 4%.

Despite the rosier outlook, there is hesitancy to say China is out of the woods, as major uncertainties around further trade talks remain. Analysts point out that meeting the demands of both sides will be difficult, and that previous negotiations during President Trump's first term were lengthy and often broke down.

Speaking to reporters at the White House on Tuesday, Trump said the relationship between the U.S. and China is "very, very good" and that he would speak to Chinese leader Xi Jinping "maybe at the end of the week."

There is also the risk that the reprieve will take away Beijing's sense of urgency in rolling out more stimulus that is still needed for the domestic economy.

Defused tensions could push China's policymakers further into wait-and-see mode, Citi Research analysts said, adding that the chance of an upward fiscal budget revision this year is considerably lower.

Delayed policy easing could pose risks to China's growth, Goldman Sachs' economists warned. They also noted the possibility of a re-escalation in tensions after the 90-day negotiation window closes on Aug. 12.

"Given still-elevated uncertainties around U.S.-China relations, the private sector sentiment may remain fragile, and macro data could be volatile in coming months," they said.

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(END) Dow Jones Newswires

May 14, 2025 05:30 ET (09:30 GMT)

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