(Bloomberg) -- China’s economic activity slowed more than expected across the board in August, adding to the likelihood that policymakers will roll out more stimulus to hit the official growth goal.

Industrial output and consumption had their worst month yet this year after a sharp slowdown in July, an underperformance that may heap more pressure on Chinese negotiators during high-level trade talks this week with US representatives. Production at Chinese factories and mines expanded 5.2% last month from a year earlier, according to data released by the National Bureau of Statistics on Monday, the smallest gain since August 2024.

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Retail sales grew 3.4% on year in August, down from 3.7% in the previous month. Expansion in fixed-asset investment in the first eight months of the year decelerated sharply to 0.5%, the worst reading for the period on record except for the pandemic year of 2020.

The yield on China’s 30-year government bonds fell one basis point to 2.17%, probably on bets the central bank may need to ease monetary policy as growth slows. Chinese equities edged up slightly after the data release, with the CSI 300 Index up 0.9% as of the mid-day break.

“We are likely to see a notable slowdown in third-quarter GDP growth,” said Serena Zhou, senior China economist at Mizuho Securities Asia Ltd. “The high base from the fourth quarter of 2024 suggests that we probably will see fourth-quarter growth slowing more significantly, jeopardizing the government’s 5% growth target if no major stimulus measures rolled out.”

With a boom in exports cooling off, many analysts and investors expected a downshift in China’s economy during the final months of 2025 after it clocked growth of 5.3% in the first half. The extent of the deceleration in China, set to be the top contributor to global growth over the next five years, will matter to a vulnerable world economy that’s slowing under pressure from Donald Trump’s tariffs.

Diplomacy between the world’s two biggest economies is meanwhile intensifying, as a 90-day tariff truce between the nations is set to expire in early November. US and Chinese representatives discussed TikTok, trade and the economy on Sunday in Madrid, according to a senior Treasury official.

The economy’s surprisingly upbeat performance in the first half of the year has left China’s leadership confident of reaching their target even with a slowdown later in the year.

While third-quarter expansion in gross domestic product may come in close to 5%, based on economist forecasts, the outlook for the final three months will be less favorable. That’s due to a higher base of comparison, as policymakers unleashed a major stimulus package in September 2024 that boosted growth.

As policymakers prepare to provide additional support to the economy in the coming months, the timing of next steps has come under debate. The People’s Bank of China will have more room to lower interest rates without worrying about pressure on the yuan to depreciate if the Federal Reserve resumes cutting borrowing costs this week.

Even so, an ongoing stock boom in China could delay its next round of easing for fear that could inflate a market bubble.

“Policymakers may fine tune policies after third-quarter GDP data is released in October,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management. “I don’t expect a large stimulus to be released, unless the growth target of 5% becomes difficult to achieve.”

Economists are also calling for more measures to stabilize the housing market, which deteriorated again in August as prices, investment and sales all weakened from the previous month. The government may also accelerate infrastructure investment projects earlier than planned, according to Mizuho’s Zhou.

China’s investment in August contracted sharply in a number of industries, such as the manufacturing of pharmaceuticals, machinery and raw chemicals, as well as education and health care.

The expansion in infrastructure investment — traditionally used by Beijing to prop up growth in down cycles — weakened to just 2% over the first eight months of the year, as the government grows increasingly selective about which projects to bankroll.

Manufacturing investment growth has also moderated as equipment and instrument purchases cooled, reflecting the waning impact of government subsidies for upgrading old equipment.

Sales of subsidized consumer goods such as home appliances, furniture and communication devices all decelerated from the previous month, partly due to the statistical effect of a high base from 2024 as authorities began to ramp up their trade-in program around the same time last year.

China needs to “focus on stabilizing employment, enterprises, markets and expectations,” the NBS said in the statement. “There are still plenty of instability and uncertainties with the external environment, and the economy still faces many risks and challenges.”

Even before the latest set of data, a slew of disappointing data sets in recent weeks already pointed to growing weakness in the economy.

A broad measure of credit slowed last month for the first time this year, while export growth fell short of forecasts and dropped to 4.4% in August. The labor market also likely weakened in recent months, based on purchasing managers’ index surveys and private polls.

What Bloomberg Economics Says...

“Weak data for a second month running suggest China’s rapid growth slowdown is driven by structural, not temporary, factors. The clearest warning sign comes from the investment slump, which underscores both renewed housing weakness and the limited impact of government-led spending as a growth lever.”

— Chang Shu and and David Qu. For full analysis, click here

Another source of pressure for the economy is the government’s “anti-involution” campaign that aims to ease overcapacity and excessive competition among companies. The effort escalated in early July and may have contributed to a fall in output that month for products ranging from steel to copper.

Even though traders have pushed equities higher in anticipation the measures will restore profitability across the economy, the government still risks hurting employment and consumption in the absence of a major stimulus package for demand. The surveyed urban jobless rate deteriorated to 5.3%.

How the campaign unfolds remains highly uncertain, making it difficult to judge when China might be able to break the grip of entrenched deflation.

In a potential sign of fallout from the measures to curb capacity, output of coal declined for the second straight month from a year ago. On a monthly basis, total investment worsened from July and contracted by more than 6% in August versus a year ago, according to estimates from Goldman Sachs Group Inc. and Capital Economics Ltd.

The slump in capital expenditure likely reflects a combination of factors ranging from extreme weather and the “anti-involution” policies to restrictions imposed on construction activity ahead of the military parade in Beijing, according to Goldman Sachs.

“A sharper slowdown might trigger monetary stimulus in the fourth quarter,” said Carlos Casanova, senior Asia economist at Union Bancaire Privee in Hong Kong. “The situation may worsen before improving, potentially sparking a new round of earnings downgrades and putting the fragile equity rally at risk.”

--With assistance from James Mayger, Winnie Hsu, Tian Chen, Shuqin Ding, Zhu Lin and Fran Wang.

(Updates with additional details throughout.)

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