U.S. Economy Slows, but Europe’s Picks Up, Raising Hopes World Will Avoid Recession
China’s reopening could further support the global economy this year but raises inflation risks
4 min
Two of the world’s largest economies moved in opposite directions at the start of the year, with U.S. businesses reporting further declines in activity in January while the eurozone saw a modest pickup.
The divergence suggests that while the U.S. economy continues to lose momentum, Europe’s could be stabilising, at least for now. The pace of contraction in U.S. firms slowed in January, according to new business surveys released Tuesday, a possible signal that the economy could be bottoming out, thanks to slowing inflation and resilient demand.
Combined, the surveys point to a global economy that looks likely to slow this year but could avoid recession. The receding threat of energy shortages in Europe, a still-growing U.S. economy, and China’s postpandemic reopening could offset the effect of higher prices and interest rates and keep the world from a steep downturn.
In the U.S., the economy continues to expand late last year, despite the Federal Reserve’s string of interest-rate increases designed to cool the economy and bring inflation under control. Higher rates have weighed heavily on certain sectors and could be causing households to pull back.
Home sales fell almost 18% in 2022 from the previous year. Retail sales were down 1.1% in December and the labour market, while still vibrant, is starting to show cracks. Employers have shed temporary workers for five straight months. Some economists see lower temporary payrolls as a precursor to a broader decline in employment.
Yet economists estimate the U.S. economy grew at a seasonally adjusted annual rate of 2.8% in the fourth quarter of last year, down slightly from 3.2% in the third quarter. Inflation, which hit a four-decade high last year, is cooling. Consumer prices rose 6.5% in December from a year earlier, down from a 2022 peak of 9.1% in June.
The Commerce Department will release fourth-quarter gross-domestic-product data on Thursday.
Until recently most economists had seen the eurozone as likely to enter a recession this year after energy bills soared because of the Ukraine war.
But the combination of a mild winter, energy-conservation efforts, moves by governments to find new natural-gas suppliers and hundreds of billions of euros in fiscal support appear to have propped up the eurozone economy.
On Tuesday, S&P Global said its composite output index for the U.S., a closely watched survey of business activity, was 46.6 in January, a slightly slower pace of contraction from December’s index of 45. In Europe, the index rose to 50.2 from 49.3. A reading above 50 points to an expansion while a reading below that level points to a contraction.
“A steadying of the eurozone economy at the start of the year adds to evidence that the region might escape recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
The U.S., on the other hand, “has started 2023 on a disappointingly soft note,” he said. “Although moderating compared to December, the rate of decline is among the steepest seen since the global financial crisis.”
Monetary policy could explain some of the divergence and could point to more trouble ahead for Europe, according to Jennifer McKeown, chief global economist at Capital Economics.
While the Federal Reserve has raised interest rates by more than 4 percentage points since March to a range of between 4.25% and 4.5%, the European Central Bank has moved at a slower pace, pushing up its policy rate by 2.5 percentage points starting in July.
Rates in Europe have further to rise while the U.S. may be nearing the end of its rate-increase cycle, she wrote in a note to clients Tuesday.
“Some of this pain has yet to come in the eurozone,” she wrote. “However, the region may avoid a recession or, if there is one, it seems likely to be milder than we had feared.”
The surveys of U.S. purchasing managers found that higher interest rates and persistent inflation weighed on demand in the manufacturing and service sectors. But employment continued to rise as companies worked through their backlog of orders.
In Europe, the surveys pointed to a further easing of price pressures in January, as business costs rose at the slowest pace since April 2021. The eurozone’s annual rate of consumer-price inflation eased for the second straight month in December and further declines are expected this year.
By contrast, January’s composite output index for the U.K. fell to 47.8 from 49.0 to reach a two-year low. That was a sign that the country’s economy may lag behind other parts of Europe as businesses grapple with a shortage of workers, the impact of interest-rate rises by the Bank of England that started at the end of 2021, and the continuing drag on business investment caused by its exit from the European Union.
Elsewhere, China lifted many of its zero-tolerance pandemic controls in early December in an abrupt change of course. While that led to an increase in Covid-19 infections and deaths, it also opened the door to a sharp economic rebound in the world’s second-largest economy, which suffered its weakest expansion in four decades in 2022.
“The relaxation of China’s strict zero-Covid policy has boosted growth prospects, whilst the warmer weather in Europe has helped temper the intensity of the energy crisis,” economists at Investec wrote in a note to clients as they raised their forecast for global economic growth this year to 2.4% from 2.2%.
But China’s reopening also presents a risk to the global economy. The release of pent-up demand could drive up the price of oil and other commodities, which could put renewed pressure on global inflation. That, in turn, could force central banks to keep interest rates high, which would weigh on growth.
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From making unpopular decisions to learning when to listen, leaders from five businesses reveal what nobody prepared them for — and how running a company has challenged their expectations.
Technology and semiconductor shares fell sharply as investors questioned the debt financing the AI infrastructure boom and confronted higher rates and Chinese competition.
Elon Musk is exploring a potential merger between Tesla and SpaceX, a deal that could reshape the future of AI, robotics, autonomous vehicles and space technology. With a combined valuation potentially reaching $3.5 trillion, the move could bring Musk’s vision of an interconnected technology ecosystem closer to reality, although a deal remains uncertain.
5 min
Elon Musk has engineered ties between Tesla TSLA 3.41%increase; up pointing triangle and SpaceX SPCX 7.79%increase; up pointing triangle that are hard to break, and now he wants to fuse them together permanently.
Musk has run both Tesla and SpaceX concurrently over the past two decades, using a schedule that dictated which days he spent focused on each business.
The companies have often shared resources and personnel, signaling their close ties. Last year, SpaceX looked into creating a spacesuit for Tesla’s humanoid robot Optimus, a person familiar with the matter said. Tesla last week showed off its new Roadster, a vehicle featuring SpaceX rocket thrusters that it hopes to soon bring to market.
And in recent months, Musk has repositioned both companies by expanding beyond their core operations toward a shared mission centered on artificial intelligence.
The world’s richest man on Tuesday signaled his interest in tying up SpaceX and Tesla, marking what would be the biggest corporate merger of all time. Because he serves as chief executive of SpaceX and Tesla, Musk said committees of independent directors at both companies are evaluating a possible deal, adding that a transaction might not come to fruition.
The committees will likely evaluate, with lawyers and bankers, how each company would fare in a potential deal and how a deal might best be structured. They then present their conclusions to their respective boards, who typically vote on whether to proceed.
“It’s an odd Kabuki dance where two groups of people are talking and I can’t be in the conversation,” Musk told SpaceX investors on Tuesday in response to an analyst’s question about a potential deal.
For Musk, the merger supports his vision of a world full of autonomous cars, humanoid robots and weekly rocket launches, as well as the data centers and satellites required to keep the whole thing running.
Some investors and analysts said they expect a transaction would be structured as an all-stock deal, with SpaceX potentially paying a modest premium for Tesla shares.
SpaceX, which has a market value of about $2 trillion, said it is seeing sharp growth in revenue across its businesses, which include operating data centers, launching rockets and operating satellite networks such as the internet service Starlink. Tesla is valued at about $1.5 trillion and is expanding its operations beyond its automotive and energy business. Shares in both companies traded higher following the news Tuesday.
Musk’s substantial ownership stakes in both companies, along with voting control at SpaceX, has enabled him to set the deal in motion. Analysts and investors said the deal will probably face regulatory scrutiny internationally, though some see Musk’s close relationship with the Trump administration as an asset to getting approval.
Blurred lines
The companies haven’t said which directors are on the special committees evaluating a potential deal. Several SpaceX and Tesla board members have either personal or business ties to Musk. And like Musk, venture capitalist Ira Ehrenpreis sits on both boards.
In a filing this week, Tesla outlined millions of dollars in business agreements with SpaceX and its subsidiaries last year, including $143 million in car sales to SpaceX, $3.3 million in advertising that it bought on the social-media platform X and $430 million in revenue from the sale of Megapack batteries for SpaceX’s data centers.
The companies also split the cost of resources including the use of Musk’s SpaceX jet and the bill for his personal security, which he runs through a private company.
Employees at both companies routinely move between companies to work on special projects, and some executives have dual roles, including Charles Kuehmann, vice president of materials engineering at both SpaceX and Tesla, and Ashok Elluswamy, the vice president of AI software at Tesla who runs a joint venture with SpaceX called Digital Optimus.
Over the years, Musk has launched new startups within his empire, including brain-implant company Neuralink, underground-tunnel developer the Boring Company and xAI, the AI startup that merged with SpaceX in February.
It is that AI business that Musk thinks can serve a market worth tens of trillions of dollars, justifying the need for a merger.
The business case goes like this: Tesla is developing robotaxis and robots, which it calls “physical AI.” SpaceX is working on the back end of physical AI: the data-center capacity and internet connection required for those robotaxis and robots to operate continuously.
“I don’t see what the value of Tesla is if it’s not merged with SpaceX,” said investment adviser Ross Gerber, a former Tesla bull turned critic invested in both companies. “If they don’t merge, the brains of everything that runs Tesla is owned by another company.”
On top of it all, both companies face constraints on the supply chains they need to make this world a reality, particularly when it comes to chips. To address this, Musk earlier this year announced a joint venture between Tesla, SpaceX and Intel to design and manufacture chips in Texas. “The most epic chip-building exercise by far,” he has said.
Musk at the wheel
For Musk, a merger would also solve two problems: demands on his attention and his lack of control at Tesla.
Tesla for years was Musk’s only public company, a status that came with greater scrutiny. There, Musk reports to a public board, as well as individual investors who make up around 30% of Tesla’s voting power, according to FactSet.
The question of Musk’s attention became a particular focus for investors and the board in recent years after he acquired Twitter in 2022 and launched xAI in 2023, and again in 2025 as he spent time in Washington, D.C., running the Department of Government Efficiency in the early months of President Trump’s second term.
As Tesla’s car business suffered in 2025, Musk threatened to take his AI ambitions outside the company if he wasn’t granted 25% voting control. Last November, Tesla shareholders approved a new pay package for Musk, which created a path for him to vastly expand his stake.
As of Sept. 30, Musk owned a roughly 20% stake in Tesla, according to the company’s proxy filing.
The SpaceX IPO gave Musk a different path. When SpaceX went public in June, the deal’s structure enabled him to have more than 80% voting power at the company—so much that he can’t be fired and decisions can’t be made without his support.
If SpaceX acquires Tesla, he will likely stay in control.
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