Economies in the U.K. and Japan shrank at the end of last year, underlining the widening gulf between robust growth in the U.S. and more anaemic conditions in the rest of the world.

The decline in activity in Japan came as a surprise to economists and meant that it has slipped in the global rankings of the world’s largest economies behind Germany and into fourth place.

In the U.K., the economy shrank for the second consecutive quarter, the shorthand definition of a recession. The U.K.’s statistics agency Thursday said gross domestic product fell at an annualized rate of 1.4% in the final three months of 2023, compared with a 3.3% increase in the U.S. over the same period.

U.K. consumer spending, the main driver of the U.K. economy, fell over the second half of 2023 even as wage growth outpaced inflation for the first time in two years, boosting consumers’ purchasing power. Japanese consumers, who are still seeing prices rise faster than wages, also cut their spending in the final quarter.

The growth numbers from the U.K. and Japan mirror similarly weak conditions in much of continental Europe and China .

The divergence between the U.S. and the rest of the rich world is in large part a story of surprising U.S. strength . The U.S. grew much faster than economists had expected it would at the start of 2023, while Europe was badly hit by high energy prices from the Ukraine war and rising interest rates. Economists forecast the growth gap will narrow somewhat over the course of the year, but remain wide.

U.S. consumer spending has been more resilient in the face of rising interest rates than in other parts of the world. Government spending in the U.S. has also remained at historically high levels for periods outside of recessions, giving the economy an added boost.

The Organization for Economic Cooperation and Development earlier this month said it expects the U.S. economy to grow by 2.1% this year, while it sees the U.K.’s economy growing by 0.7% and Germany’s economy by 0.3%.

To be sure, the declines in activity in Europe and Japan have been relatively modest and are a reflection of slow-growing economies that by nature fall into contraction more often than those that have a higher sustained level of growth.

And while economic output declined in a number of rich countries as 2023 drew to a close, job markets in Europe and Japan remained tight, as they were in the U.S. As a result, many economists hesitate to describe the U.K. and Japanese downturns as full-blown recessions.

Policymakers expect economies to pick up as inflation ebbs in the months ahead.

“We’re seeing some signs of a pickup,” Bank of England Gov. Andrew Bailey told lawmakers Wednesday.

Japan’s unemployment rate fell to an 11-month low in December, and the Bank of Japan ’s Tankan survey “showed that business conditions across all industries and firm sizes were the strongest they’ve been since 2018.”

Many economists expect the Bank of Japan to end its policy of negative short-term interest rates in either March or April, although the bank hasn’t confirmed that.

“We doubt that today’s GDP figures will prevent the Bank [of Japan] from ending negative interest rates in April,” said Marcel Thieliant , head of Asia-Pacific at Capital Economics.

The decline in its GDP during the second half of the year, and the yen’s weakness relative to the euro, meant that Japan dropped from third place in the global rankings of economic heft when measured in U.S. dollars.

Germany takes over the third-place spot behind the U.S. and China, despite Europe’s largest economy contracting during 2023.  Japan lost its second-place spot to China in 2010 .

The Michigan plant where the F-150 Lightning electric truck is built used to vibrate with excitement.

President Biden visited in 2021 and test drove the blazing-fast pickup. Before the first ones even started rolling off the assembly line in the spring of 2022, Ford said it would expand the factory to quadruple the number it could build.

That energy is rapidly fading. Ford is cutting the plant’s output by half, and workers are relocating to other facilities, mostly those making gas-powered pickups and SUVs.

The sudden change “was a little bit of a shocker,” said Matthew Schulte, who inspects trucks at the factory in suburban Detroit. “Reality has set in.”

As recently as a year ago, automakers were struggling to meet the hot demand for electric vehicles. In a span of months, though, the dynamic flipped, leaving them hitting the brakes on what for many had been an all-out push toward an electric transformation.

A confluence of factors had led many auto executives to see the potential for a dramatic societal shift to electric cars: government regulations, corporate climate goals, the rise of Chinese EV makers , and Tesla ’s stock valuation , which, at roughly $600 billion, still towers over the legacy car companies.

But the push overlooked an important constituency: the consumer.

Last summer, dealers began warning of unsold electric vehicles clogging their lots. Ford, General Motors , Volkswagen and others shifted from frenetic spending on EVs to delaying or downsizing some projects. Dealers who had been begging automakers to ship more EVs faster are now turning them down .

Even Tesla Chief Executive Elon Musk warned of “notably lower” growth in vehicle deliveries for the company in 2024.

“This has been a seismic change in the last six months of last year that will rapidly sort out winners and losers in our industry,” said Ford Chief Executive Jim Farley on an earnings call in early February.

EV sales continue to grow, and auto executives say they remain committed to the technology. But many are recalibrating their plans.

Ford has pulled back on EV investment and could delay some vehicle launches, while increasing production of hybrids , which run on both gasoline and electricity. It lost a staggering $4.7 billion last year on its battery-powered car business and projects an even bigger loss this year, in the range of $5 billion to $5.5 billion.

Some auto executives acknowledge they got ahead of the market with overzealous demand projections. Pandemic-era supply-chain shocks and a resulting car shortage created long waiting lists and early buzz for EVs, making the industry overly optimistic.

Only later, as a barrage of new EVs hit the market, did executives realize that car buyers were more discerning than they expected. Many were hesitant to pay a premium for a vehicle that came with compromises.

Farley and other industry CEOs are still confident that EVs will eventually take off, albeit at a slower pace than initially envisioned. But for now, the massive miscalculation has left the industry in a bind, facing a potential glut of EVs and half-empty factories while still having to meet stricter environmental regulations globally.

“Ultimately, we will follow the customer,” GM Chief Executive Mary Barra told analysts this month.

In 2020, as the car market unexpectedly heated up during pandemic lockdowns, traditional automakers shifted from dabbling in electric cars to launching an all-out blitz. They outlined plans to build dozens of battery factories, EV assembly plants and vehicle models, pledging more than a half-trillion dollars of investment in the technology through 2026, according to consulting firm AlixPartners.

The rapid rise of Elon Musk’s Tesla added to the urgency. Over just a few years, its market value rocketed past those of legacy car companies. Wall Street cheered strategic moves toward electrics and bid up shares of EV startups.

Tougher auto-emissions restrictions in Europe and China gave car companies little choice but to add more EVs or risk penalties. The Biden administration steered the industry toward more environmentally friendly cars, earmarking hundreds of billions in subsidies for battery production, consumer tax breaks and EV chargers.

At the start of 2023, car executives were expecting to cash in on their EV bets.

GM’s Barra had been among the earliest and most vocal industry advocates of shifting to EVs. The Detroit automaker set a goal of phasing out nearly all gas-engine vehicles by 2035.

“This is a breakout year,” Barra said on GM’s January 2023 earnings call . GM was finally making its own batteries and said it was ready to start cranking out EVs to satisfy pent-up demand for a new electric Cadillac SUV and Hummer pickup truck.

Ford, emboldened by swelling orders for the F-150 Lightning, increased prices for the pickups by as much as $20,000 over the original sticker. Elsewhere, car executives were talking up their plans to accelerate EV factory work.

Trouble ahead

Then warning signs began to appear. In mid-January of last year, Tesla slashed prices on some models by more than 20%, triggering a chain reaction.

Used-car dealers who had Tesla Model 3s and Model Ys in stock saw their values plummet by thousands of dollars. Customers who had bought Teslas at higher prices were furious.

“Why cut EV prices when demand is greater than supply?” Bank of America analyst John Murphy wondered.

Musk insisted that there was no demand problem. The company was trying to broaden appeal by making its cars more affordable, he told analysts.

Inside Ford, staffers analysed what Tesla’s cuts might mean for its own EV sales. About two weeks later , Ford reduced prices on some versions of its Mustang Mach-E SUVs by nearly 9%.

Speaking to analysts in May, Farley largely shrugged off the pricing pressures, saying they weren’t reflective of broader interest in EVs. He remained upbeat about Ford’s outlook, reiterating plans to expand Lightning output.

Around that time, car dealer Mickey Anderson began noticing that EVs were accumulating on his lots in Kansas, Nebraska and Colorado.

At first, Anderson and other retailers thought the slower sales were a fluke. At meetings with manufacturers in the late spring and summer, the dealers compared notes.

“We were worried,” Anderson recalled. “We went from wait lists to six months of supply, seemingly in a matter of weeks.”

As car companies entered the summer-selling season, there were other worrying signs. U.S. EV sales for the first half of 2023 rose 50% from a year earlier, down from a 71% increase in the first half of 2022.

The wave of early EV adopters willing to splurge had receded, and the next round of potential customers was proving more hesitant. They had more questions about how far a car could go on a single charge , and the life expectancy of batteries. They worried about charging times, repair costs, and not having enough places to plug in, according to dealers and surveys.

Interest rates were rising, pushing up monthly payments on EVs, which already were selling, on average, for about $14,000 more per vehicle than gas-engine models, according to research firm J.D. Power.

Lyndsey Grover, a Dallas-based paediatric anaesthesiologist, said her husband was pushing her last year to replace her hybrid Volvo with an all-electric version, for environmental reasons.

She looked at a Rivian SUV, Tesla Model Y and an electric Mercedes, but ended up with another Volvo—a plug-in hybrid that could travel some distance on battery power before switching to traditional hybrid mode.

Her husband already had a Tesla Model S. She said it often requires a full night of charging at home, and even then, its range on a single charge often fell below estimates displayed by the vehicle. She felt the family needed at least one gas-powered vehicle.

GM was having trouble processing battery cells , a bottleneck that was preventing it from getting EVs to showrooms. Manufacturing delays left buyers waiting for delivery of models such as the Cadillac SUV and Hummer pickup truck.

Late last July, GM’s Barra told analysts plenty of consumers still wanted the company’s EVs. “These vehicles are getting to the dealers’ lots, and if they’re not already sold, they’ve got a list of people who are waiting for them,” she said.

Two days later, Ford’s Farley struck a different tone . “The paradigm has shifted,” he told analysts. Although consumers were still buying EVs, Ford’s pricing power was deteriorating compared with gas-engine models, he said, and the market for EVs would remain volatile.

Jefferies analyst Philippe Houchois asked Farley what had changed. “A few weeks ago when we saw you in Detroit…it’s like you had religion” on EVs, he told the CEO.

Farley replied that Ford was responding to market realities.

A Ford spokesman said that producing significant numbers of electric pickups before its rivals enabled the company to become an EV truck leader and to attract customers from other brands. Learning about the habits of EV buyers, he said, would benefit future vehicle development.

Late last summer, Ford dealer Ed Jolliffe saw on his store’s computer system that the factory planned to ship him about a dozen Lightnings. That worried him.

Earlier, his Detroit-area dealership had been receiving one or two Lightnings at a time, and his salespeople had had no trouble finding buyers. More recently, prospective customers seemed more hung up on the monthly payment of nearly $1,000.

Jolliffe had spent a half-million dollars installing EV fast chargers. He was getting ready to rent a billboard along the nearby interstate declaring: “Fastest Chargers Downriver!”

“We were all-in,” he said. So he swallowed hard and agreed to take the trucks.

Changing plans

The unraveling came swiftly. In a single month last fall, the average interest rate on an electric-car purchase jumped from 4.9% to 7%, making monthly payments even less affordable for some shoppers, said Tyson Jominy, vice president of data and analytics for J.D. Power.

Suddenly, once-long waiting lists for EVs shrank and buyers dropped reservations.

Over a 10-day span in October, the tone of automakers in Detroit and beyond turned gloomier. GM said it would delay by one year a $4 billion overhaul of a suburban Detroit factory to build new electric pickup trucks, citing “evolving EV demand.”

The next day, Elon Musk said that not as many people could afford a Tesla given higher interest rates and tougher economic conditions. Affordability was keeping a lid on demand, he said during a call to discuss third-quarter results.

A week later, on GM’s quarterly call , Barra described the transition to EVs as “bumpy,” and said the company wouldn’t meet a self-imposed goal of producing 400,000 EVs over a two-year period through mid-2024.

Two days later, Ford said it would defer $12 billion in electric-vehicle investments and focus on increasing hybrid production, citing the need to better match demand.

By late last year, it was becoming clear that sales of hybrids—once dismissed by some automakers as an unnecessary half-measure—were taking off and would outsell EVs in 2023.

“People are finally seeing reality,” said Toyota Motor   Chairman Akio Toyoda . For years, Toyota and other EV-cautious carmakers had been touting hybrids as a consumer-friendly way to reduce carbon emissions.

In November, thousands of U.S. dealers signed a letter urging Biden to ease proposed regulations that would push the industry to sell more battery-powered cars. “Last year, there was a lot of hope and hype about EVs,” the dealers wrote. “But that enthusiasm has stalled.”

Some auto retailers say that they are now selling EVs at a loss to clear unwanted inventory.

Jolliffe, whose car dealership is a 25-minute drive from the Lightning plant, is struggling to understand what happened. On a recent weekday, he peeked out his window at eight Lightnings and four Mach-Es.

“Nobody’s opening the door” to check them out, he said. “There just seems to be this hesitancy that is hitting hard.”

US: Inflation eased again in January but came in above Wall Street’s expectations, clouding the Federal Reserve’s path to rate cuts and potentially giving the central bank breathing space to wait until the middle of the year.

The Labor Department reported Tuesday that consumer prices rose 3.1% in January from a year earlier, versus a December gain of 3.4%. That marked the lowest reading since June.

Still, the consumer-price index was higher than the predicted 2.9%, a disappointment for investors who hope the Fed will cut rates sooner rather than later. Rate cuts tend to help stock prices by boosting economic activity and reducing competition from bonds for investor dollars.

The release gave a nasty jolt to markets. Stocks fell sharply and bond yields rose. The Dow Jones Industrial Average slid more than 500 points, or about 1.4%, its worst one-day decline since March. For all three major U.S. stock indexes, it was their worst performance on a CPI release day since September 2022 , according to Dow Jones Market Data.

The yield on the 10-year Treasury note rose to 4.315%, bringing it to its highest level since the end of November.

Interest-rate futures, which before Tuesday’s report implied the central bank would probably begin cutting rates by its May meeting, now suggest a June start date is more likely.

Where the Fed could go from here

Investors’ belief that Fed cuts were imminent has helped fuel the rally in stocks. The Dow on Monday had hit its 12th record close of 2024.

But Tuesday’s inflation report underscores why Fed officials have been dismissive of such expectations. Some Fed officials have suggested that the pace of improvement over the past six months might overstate underlying progress in containing price pressures.

Officials have said they aren’t ready to entertain rate cuts at their next meeting, March 19-20, because they want to see more evidence that inflation is returning to their 2% target.

Fed Chair Jerome Powell has said officials want to see more evidence that inflation is returning to its 2% goal, which is measured against a separate gauge to be released later this month by the Commerce Department.

“It’s not that the data aren’t good enough. It’s that there’s really six months of data,” Powell said in an interview on “60 Minutes” earlier this month. “It doesn’t need to be better than what we’ve seen, or even as good. It just needs to be good.”

Core prices, which exclude food and energy items in an effort to better track inflation’s underlying trend, were up 3.9% in January. That was equal to December’s gain, which was the lowest since mid-2021.

From a month earlier, overall prices were up a seasonally adjusted 0.3%, and core prices were up 0.4%—larger gains than economists expected.

Two measures of inflation

The Fed’s preferred measure of inflation has been running cooler than the Labor Department’s, and analysts said that could continue in January. The figures released Tuesday calculate medical care and airfares differently, and those categories were especially strong in January. The Labor Department’s measure also puts a much higher weight on shelter costs, which for both owners and renters are derived from rents. Shelter costs accounted for 0.23 percentage point of the monthly gain in overall prices in January. Shelter costs were up 0.6% month over month.

Some Fed officials have said they are looking for evidence that a slowdown in price pressures is broadening beyond goods such as used cars, which have seen prices decline over the past year. Tuesday’s figure showed the opposite: Price declines accelerated for goods while price increases accelerated for services.

And prices are still far above where they were before the pandemic—especially for items   that most Americans buy often, like groceries.

The sting of those past price increases might be part of why so many Americans remain down on the economy . An analysis conducted by Goldman Sachs economists suggests that frustration with high price levels might have contributed to low confidence readings that persisted in the early 1980s even after inflation had slipped sharply.

“It does seem like it takes a while for confidence to recover, in part because people are focused on levels rather than changes,” said Goldman chief economist Jan Hatzius .

The Labor Department’s measure of overall consumer prices was up 19.6% this January from four years earlier, just before the pandemic hit. In contrast, prices were up 8.9% in the four years ended January 2020.

Economists generally expect inflation to cool this year, though they caution the process could be bumpy. Cooling prices for newly signed leases, for example, should eventually translate into lower shelter costs.

“I can tell inflation has gotten better,” said Mike Poore, of Henderson, Ky. “That’s definitely a good thing. It’s a shame it’s not happening quicker.”

The high cost of groceries

A Bank of America Institute analysis of customer data found households tended to make far more transactions a month for food and drinks at restaurants and bars, for groceries and for gasoline than they do for other items. Labor Department figures show that prices in all three of those frequent-transaction categories are higher, relative to before the pandemic, than prices overall.

Research from University of California, Berkeley economist Ulrike Malmendier and three co-authors found that prices for items that people buy more often play an outsize role in framing their inflation expectations. “In terms of what gets ingrained in people’s brains, it’s stuff that they purchase frequently,” she said.

Other research Malmendier has conducted examines the scarring effects of inflation episodes , which can have persistent, and potentially costly, effects on people’s financial decisions. She is heartened by the fact that inflation has retreated relatively quickly from the 9.1% it hit in June 2022 —a contrast to the experience of the late 1970s and early 1980s, when inflation remained elevated for years.

“I’m a little less worried about long-lasting effects than I was in 2022,” she said.

China’s baby bust is happening faster than many expected, raising fears of a demographic collapse. And coping with the fallout may now be complicated by miscalculations made more than 40 years ago.

The rapid shift under way today wasn’t projected by the architects of China’s one-child policy—one of the biggest social experiments in history, instituted in 1980. At the time, governments around the world feared overpopulation would hold back economic growth. A Moscow-trained missile scientist led the push for China’s policy, based on tables of calculations that applied mathematical models used to calculate rocket trajectories to population growth.

Four decades later, China is aging much earlier in its development than other major economies did. The shift to fewer births and more elderly citizens threatens to hold back economic growth. In a generation that grew up without siblings, young women are increasingly reluctant to have children —and there are fewer of them every year. Beijing is at a loss to change the mindset brought about by the policy.

Births in China fell by more than 500,000 last year, according to recent government data, accelerating a population drop that started in 2022 . Officials cited a quickly shrinking number of women of childbearing age—more than three million fewer than a year earlier—and acknowledged “changes in people’s thinking about births, postponement of marriage and childbirth.”

Some researchers argue the government underestimates the problem, and the population began to shrink even earlier.

Following the data release, researchers from Victoria University in Australia and the Shanghai Academy of Social Sciences predicted that China will have just 525 million people by the end of the century. That’s down from their previous forecast of 597 million and a precipitous drop from 1.4 billion now.

“Our forecasts for 2022 and 2023 were already low but the real situation has turned out to be worse,” said Xiujian Peng, a senior research fellow at Victoria University who leads the population research in Melbourne.

China’s fertility rate is approaching one birth for every woman , less than half the 2.1 replacement rate that keeps a population stable. In the late 1970s, the fertility rate hovered around 3.

At the time, China was coming out of the chaos of the Cultural Revolution and about to embark on economic reforms. The country’s leader, Deng Xiaoping, and other officials became alarmed when a group of scientists told them that unless they started restricting births, China would have more than four billion mouths to feed in a hundred years.

An essay by some of the scientists published by the official People’s Daily in early 1980 suggested China’s search for a response to overpopulation “points to bringing the fertility rate down to 1…each couple having only one child.”

That fall, China started enforcing the one-child policy nationwide—but the calculations had missed some crucial factors.

Population fears

China wasn’t the only country worried about overpopulation at the time. The rapid rise in the global population in the 1960s and ‘70s prompted fears that humanity would reproduce faster than food production could rise, an idea argued nearly two centuries earlier by economist Thomas Malthus.

Chinese officials were increasingly reviving scientific research after the Cultural Revolution. While social scientists had been persecuted by Mao’s Red Guards, others doing work related to the military had been partly shielded.

The group included Song Jian, a protégé of the father of China’s atomic-bomb program and one of China’s top scientists working on satellites and rockets. Song had studied in Moscow, where he got advanced degrees in a branch of mathematics known as control theory and in military science. Military officials sent him to a launch site for rockets and satellites in the Gobi Desert to escape the chaos of the Cultural Revolution.

Song, who eventually became China’s senior cabinet member heading science and technology, is now 92. He didn’t respond to requests for comment sent to the State Council and the Chinese Academy of Engineering.

In 1975, Song had been part of a Chinese academic delegation visiting the University of Twente in the Netherlands, where he got to know a Dutch mathematician, Geert Jan Olsder. Three years later, the two met a second time, at a conference in Finland.

Olsder, now in his 80s, said he talked about how his research with other mathematicians had been inspired by the warnings about finite global resources and how mathematical models could be applied to birthrates.

Song spoke with the others in fluent English and showed a clear interest in mathematical modelling, Olsder wrote in an email. If the two hadn’t met, he said, he’s sure that some kind of population policy would have started in China, but perhaps a little later. “I feel like a domino stone in a long series of such stones,” he wrote.

Song refined his modelling over the next few years, and with a team of scientists began calculating how different fertility rates could affect China’s population size. In late 1979 he began to present officials with reports based on their modelling. He calculated that, at a constant fertility rate of three babies for every woman, China’s population would hit 4.26 billion by 2080.

With his computer-assisted mathematical models and political connections, Song caught the attention of top leaders. He argued that rapid population growth would prevent China from becoming a rich, modern country, said Susan Greenhalgh, an anthropologist at Harvard University who has written books about the one-child policy.

“He used a frightening narrative of a coming demographic-economic-ecological crisis to persuade people,” she said.

To ward off skepticism, officials said China could switch gears if births dropped too much. “In 30 years, the current problem of especially dreadful population growth may be alleviated and then [we can] adopt different population policies,” the Communist Party said in an open letter in 1980.

Within a little more than a decade, the fertility rate had dipped below the replacement rate. The cohort of young women was still massive, which kept the population growing. But the number of newborn girls was quickly dwindling.

Impact

As the decades passed, a growing number of demographers and economists called out the policy as outdated and flawed. China’s fertility rate would have gone down on its own as life expectancies rose and economic conditions improved, they say.

One factor missing from Song’s population math was human behaviour. The government’s sometimes brutal enforcement, including forced abortions and sterilisations, as well as decades-long propaganda about the benefits of having a small family , left a lasting one-child mindset. The modelling also failed to take into account the traditional preference for sons. If couples could only have one child, they would prefer to have a boy.

Young women are now at the core of China’s demographic dilemma. They are increasingly reluctant to have children—and there are fewer of them every year.

Greenhalgh, the Harvard anthropologist, said that the women growing up under the one-child policy were raised in line with Beijing’s goals of a smaller but what it called “higher-quality” population: well-educated, savvy and independent. “These women are not going to accept going back to the family to be housewives,” she said.

Apart from cultural and social changes, Song’s model hadn’t taken into account economic forces, such as the enormous migration flows to cities unleashed by Deng’s reforms, which played a bigger role than anyone had imagined in pushing down fertility rates, researchers have said.

Zuo Xuejin, a retired demographer who is leading the research team at the Shanghai Academy of Social Sciences, sounded alarms about demographic implosion more than a decade ago, saying the conditions that may have warranted birth-restriction measures had all faded away.

“For many years overpopulation was China’s major concern. It was difficult to convince the government and the public that China will have the problem of fast decline and aging of the population,” Zuo wrote in an email.

Song has said he believed it had been a good call. China had successfully defused the bomb that could have led to a “population explosion,” he wrote in a 2010 essay published by the University of Jinan, his alma mater. “Zero growth [in population] is the destiny of modern mankind and an urgent task for contemporary China,” Song wrote. He estimated China’s population wouldn’t start shrinking until after 2035. He was off by more than a decade, with official data showing the drop starting in 2022.

Beijing has said the policy prevented 400 million births, a claim it has often put forth as a kind of Chinese gift to the world, including at the 2009 climate summit in Copenhagen. Demographers have disputed the figure, saying China’s fertility rate would have gone down on its own as economic conditions improved.

Demographer scramble

Even when Beijing dropped the one-child policy in 2015, leaders didn’t abolish birth restrictions altogether. Instead, it just pivoted to a two-child policy. Now, Beijing is urging people to have three, trumpeting the need to return to a “birth-friendly culture.”

Entrepreneurs, economists and demographers have tried to convey the idea that China needs more babies .

James Liang , co-founder and chairman of travel service provider Trip.com Group and a research professor of economics at Peking University, co-founded YuWa Population Research Institute, a private think tank focused on demographic and public policy analysis.

Liang estimated that China needs to devote 5% of its gross domestic product—roughly equivalent to its education spending—on direct subsidies to promote births and lower the costs of raising children in order for the fertility rate to recover to 1.4, the average rate of advanced economies. His company gives its long-term employees an annual cash bonus of 10,000 yuan ($1,406) for each of their children until they are 5 years old.

Demographers are trying to catch up on the rapidly falling births. The United Nations’ population predictions for China, which were based on the country’s 2020 census and assumed a fertility rate of 1.19, are already out of step with reality.

Patrick Gerland, head of the U.N.’s population estimates and projection section, said their computing tries to capture long-term trends and isn’t made for rapid changes. He agrees with other researchers that put China’s fertility rate closer to 1.0.

“In the case of a country like China where the fertility from one year to the next year has been changing so fast, we’ll have smaller population [projections] than what we had expected two years ago,” he said. The U.N. plans to update its forecasts in July.

Yi Fuxian, a senior scientist in obstetrics and gynaecology at the University of Wisconsin-Madison and a critic of China’s birth restrictions, has long argued the situation is even worse than official data suggests. Yi believes China’s population actually started shrinking years ago, based on birth estimates pieced together from other available data, such as school enrolment and the number of vaccines for newborns.

“All of China’s population policies for decades have been based on erroneous projections,” Yi said. “China’s demographic crisis is beyond the imagination of Chinese officials and the international community.”

Once a generation of young people has made up their minds, it’s hard to change them, said Cai Yong, a sociologist at the University of North Carolina at Chapel Hill.

It’s possible fertility rates could now increase with official messages and policies promoting bigger families to a newer generation, said Cai, but “if it’s going to happen, it’s not going to happen in the short term.”

China’s massive rollout of renewable energy is accelerating, its investments in the sector growing so large that international climate watchdogs now expect the country’s greenhouse-gas emissions to peak years earlier than anticipated—possibly as soon as this year.

China installed 217 gigawatts worth of solar power last year alone, a 55% increase, according to new government data. That is more than 500 million solar panels and well above the total installed solar capacity of the U.S. They appeared everywhere from the deserts of Inner Mongolia to the mountains of southwest China to rooftops across the country, including on the Great Hall of the People on the edge of Tiananmen Square.

Wind-energy installation additions were 76 gigawatts last year, more than the rest of the world combined. That amounted to more than 20,000 new turbines across the country, including the world’s largest, planted on towers in the sea off China’s east coast.

The low-carbon capacity additions, which also included hydropower and nuclear, were for the first time large enough that their power output could cover the entire annual increase in Chinese electricity demand, analysts say. The dynamic suggests that coal-fired generation—which accounts for 70% of overall emissions for the world’s biggest polluter—is set to decline in the years to come, according to the Paris-based International Energy Agency and Lauri Myllyvirta , the Helsinki-based lead analyst at the Centre for Research on Energy and Clean Air.

China’s expanding renewables footprint is shaping the global response to climate change. Its companies are the leading manufacturers of clean-energy technology, from solar panels and wind turbines to electric vehicles. That is stoking concerns in the rest of the industrialised world about depending on China for their energy supplies in the future.

At the same time, China’s deployment of renewables at home is breathing new life into international climate diplomacy . Its rapid emissions growth long provided fodder for critics who said Beijing wasn’t committed to fighting climate change or supporting the Paris accord , the landmark climate agreement that calls for governments to attempt to limit warming to 1.5 degrees Celsius over preindustrial temperatures. Now, analysts and officials say Beijing’s efforts are lending momentum to the Paris process, which requires governments to draft new emissions plans every five years.

“An early peak would have a lot of symbolic value and send a signal to the world that we’ve turned a corner,” said Jan Ivar Korsbakken, a senior researcher at the Oslo-based Center for International Climate and Environmental Research.

In 2020, Chinese leader Xi Jinping pledged that the country’s emissions would begin falling before 2030 and hit net zero before 2060, part of its plan prepared under the Paris accord. He also said China would have 1,200 gigawatts of total solar- and wind-power capacity by the end of this decade. The country is six years ahead of schedule: China reached 1,050 gigawatts of wind and solar capacity at the end of 2023, and the China Electricity Council forecast last month that capacity would top 1,300 gigawatts by the end of this year.

“China’s acceleration was extraordinary,” said Fatih Birol , the executive director of the Paris-based International Energy Agency.

Chinese authorities publish regular data on energy consumption and generation but not overall greenhouse-gas emissions. Transition Zero, a U.K.-based nonprofit that uses satellite images to monitor industrial activity and emissions in China, says the official data are “broadly aligned and consistent” with theirs.

Once the peak arrives, some analysts expect an emissions plateau to follow rather than a rapid fall in the following years. That is a problem, scientists say, because the world’s major emitters must sharply cut global emissions this decade—by 43% compared with 2019—to fulfill the Paris accord.

Climate Action Tracker, a scientific consortium that evaluates governments’ emissions plans, rates China’s current policies as “highly insufficient” to meet the 1.5 degrees Celsius goal . Its latest analysis, published in November, says China’s emissions should peak by 2025. If wind and solar installations can average 300 gigawatts a year—as they did last year—China’s emissions should fall significantly by the end of the decade, the consortium says. The actions and policies of the U.S., where emissions have been falling, were graded as “insufficient.”

Still, moving China’s timeline for an overall emissions peak forward could shave off around 0.3 to 0.4 degrees Celsius of projected global warming if emissions started to decline next decade, analysts say. Emissions plans submitted to date under the Paris accord would put the world on track to warm by 2.5 degrees Celsius this century, a United Nations Environment Program report said in November.

China is still building coal-fired power plants , fuelling criticism from Western officials that it is locking in carbon-dioxide emissions years into the future. Beijing has been telling Western officials that the new plants won’t be as polluting as they fear. They are replacing older, higher-emitting plants, and will run far below full capacity, used largely to maintain electric-grid stability as China generates more of its power from intermittent wind and solar. In November, China unveiled a system of capacity payments for coal-fired plants that will allow them to earn money even when they are running as backup power sources. Xi said in 2021 that China would begin to phase down its coal consumption starting in 2026.

The exact timing of China’s peak depends on factors such as economic growth and weather in the next few years, analysts say. Growth is expected to slow following China’s real-estate sector slump —unless Beijing undertakes a major new program of economic stimulus that would boost industrial emissions. Another spell of drought this summer would push the country’s coal plants to run harder to replace lost hydropower generation.

The most certain variable in the equation is the breakneck pace of China’s renewable-energy rollout, which analysts expect will continue to add 200 to 300 gigawatts of new wind and solar capacity a year. The investments in renewable energy have become a major driver of the Chinese economy. The country’s clean-energy spending totaled $890 billion last year, up 40%. Without that growth, investment in China would have been flat as the country reels from the slump in its real-estate sector, according to the Centre for Research on Energy and Clean Air.

The investments include clean-energy installations and the construction of enormous factories to produce solar panels, wind turbines, batteries and electric vehicles—turning the country into the leading manufacturer of clean tech. Its factories in those sectors now have plenty of unused capacity . The adoption of electric vehicles is happening so rapidly that analysts say peak gasoline demand in China was already reached last year.

At the United Nations COP28 climate conference in Dubai in November, Xie Zhenhua , then China’s climate envoy , said the government would calculate the year and absolute volume of the country’s emissions peak. He also said Beijing is drawing up its next emissions plan under the Paris accord.

“Our country will do as it’s said and strive to do even better,” he said. “I have faith.”

Clayton Wiles, a truck driver in North Carolina, earns about 20% more than three years ago. Kristine Funck, a nurse in Ohio, has won steady pay raises, built retirement savings and owns her home. Alfredo Arguello, who opened a restaurant outside Nashville when the pandemic hit, now owns a second one and employs close to 50 people. But ask any of them about the state of the American economy, and the same gloominess surfaces. “Unstable” is how Arguello describes it. Said Funck:

“Even though I’m OK right now, there’s a sense it could all go away in a second.”

There’s a striking disconnect between the widely shared pessimism among Americans and measures that show the economy is actually robust. Consumers are spending briskly —behaviour that suggests optimism, not retrenchment. Inflation has tempered . Unemployment has been below 4% for 24 straight months, the longest such stretch since the 1960s. The disconnect has puzzled economists, investors and business owners. But press Americans harder, and the immediate economy emerges as only one factor in the gloomy outlook.

Americans feel sour about the economy, many say, because their long-term financial security feels fragile and vulnerable to wide-ranging social and political threats. Reliable steps up the economic ladder, such as a college degree, no longer look like a good investment. War overseas, and an emboldened set of hostile nations, have made the world feel dangerous.

Uninspiring leaders at home, running a government widely seen as dysfunctional, have left people without hope that America is up to the challenge of fixing its problems. The broad reasons for America’s dim outlook suggest that even further improvement in the economy might not be enough to lift the nation’s mood.

In an election year, that is shaping up as one of President Biden’s biggest impediments to winning a second term. He has received little credit so far for an economy that has foiled predictions of a recession and instead grew 3.1% in the past year, far ahead of the pace in 2022. By some metrics, that improvement is starting to give way to slightly rosier views of the economy. Consumer sentiment, as measured by the University of Michigan, recently posted the biggest two-month increase since 1991 .

Yet it remains about 20% lower than during the robust economy of early 2020, just before the Covid-19 pandemic started, and it stands at about levels typically seen at the end of a recession rather than in an economy posting solid growth. Interviews with Americans across the country—some affluent, some just scraping by; some with advanced degrees and others with blue-collar jobs; some Republican, some Democrat—show they are weighed down by fears of an unpredictable world in which no one in government or business is competent to steer the nation through precarious times.

“You could argue unemployment is 3.7%, but who cares with this level of uncertainty?” said Arguello. “Because that’s what people are feeling. They’re not feeling hope. They’re not feeling one country. They’re feeling a divisive, divided United States of America.”

No ‘coherent plan’

Theresa Foster estimates her family’s net worth is up because the value of their home in suburban Albany, N.Y., has risen around 20% since the pandemic started.

“But every time I go to the store I am shocked by the prices,” said Foster, who earns more than $200,000 combined with her husband’s income. “I feel like we’re on really thin ice, that it’s really fragile, that neither political party has any theoretical foundation for what they want to do with the economy.”

Foster, 57, earned a master’s degree on GI Bill benefits and works part time at a nonprofit, while her husband works full time in human resources. To her, the notion that cooling inflation should ease her financial worries is akin to telling a person who is bleeding out that the flow of blood has slowed.  What upsets her, she said, is that the government continues to spend money while racking up blunders, such as the botched withdrawal of U.S. forces from Afghanistan. None of that instills confidence in leaders’ ability to handle other complex issues.

“I feel like no matter what they tell me about the economy, they don’t really know, because they don’t have a coherent plan,” she said.  The coming election has left her dispirited about the likely nominees, President Biden and Donald Trump , whom she calls “Loser 1 and Loser 2.”

Foster voted libertarian in the last two presidential elections in protest and was registered independent until she recently registered as a Republican to vote against Trump in New York’s presidential primary in April. Funck, the nurse in Milford, Ohio, said she sees the country’s decline in the high number of uninsured and unhoused patients whom she cares for at a large Cincinnati medical centre.

“The politicians seem to be making out really good and then everybody else is struggling,” said Funck, who is 52 and an independent voter who backed Biden in 2020.

She earns about $90,000 a year, had her student loans forgiven after two decades, and has no children to support. Still, she constantly fears she’ll be derailed by an unexpected expense, and worries that the wars in Gaza and Ukraine could push up the prices of oil and grain.  After her mortgage and car payments, groceries and utility bills, there’s very little left over, she said. She’s prioritised saving for retirement “because I’m not expecting Social Security to be around, and I have to be able to support myself.”

Economic cracks

While many groups of Americans have made gains during the pandemic recovery, some cracks have emerged.  Americans in lower-paying industries saw some of the strongest pay raises in recent years, but wage growth is now slowing overall, and more so for these workers.

Research from the Federal Reserve Bank of Dallas found that low-income households disproportionately bear the brunt of inflation , in part because of the high share of their income that goes toward food, gas and rent.  While inflation has cooled substantially from its peak in 2022, wage growth only began to outpace price increases in mid-2023 , meaning many Americans are still reeling from a long stretch in which it felt like their earnings couldn’t go far enough. The unemployment rate remains at near-record lows, but layoffs have hit some sectors of the economy with force, including technology and some other white-collar fields, such as accounting and media.

James Welch, a married father of two, moved his family from Atlanta to Plano, Texas, to take a job as a manager at an online fitness company after he was laid off early in the pandemic from a hotel company. Last July, he was laid off again. Welch, 49, said he’s depleted close to $450,000 in retirement and emergency savings in recent years to fund the move, medical expenses and costs for two children in college. His wife’s salary of roughly $72,000 annually as an operations manager is keeping the family afloat.  Welch said he thinks he was the victim of cost-cutting moves at the company. He said shortly after he was laid off, he saw his job reposted for lower pay.

Mood mismatch

To many economists, the negative outlook doesn’t reflect the current economic life of most Americans.

“There’s some justification for some negativity about the economy, but nothing resembling the amount of negativity seen in some of the survey data,” said Jason Furman , a top economic adviser to President Barack Obama.

Furman said that, historically, inflation and unemployment levels have been predictors of consumer sentiment, and that the recent spate of rising prices had unsettled consumers.

“It’s just not a good enough reason for them to be as down on the economy as they say they are,” he said.

Many Americans point to structural changes in the economy that have left them anxious about the future. The decline of company pensions has shifted more of the risk of funding retirement from employers to workers. And many who once thought they could count on a college degree as a ticket into the middle class now question its value.

Amy Bos, 44, a married mother of three in Jackson, Mich., said she wouldn’t necessarily recommend college for her 18-year-old daughter. Bos herself returned to college in her 30s to help her upgrade from a job as a pharmacy technician to higher-paying work in human resources, which roughly doubled her pay to $30 an hour. But she said she sacrificed immensely to pay off $41,000 in student loans, which she did only recently.

“A lot of people go to college and either don’t work in their degree field or get a lot of debt for a job that doesn’t have the ability to make very much money,” Bos said.

Some 78% of Americans said they aren’t confident their children’s lives will be better than their own, a Journal-NORC survey found last year. That’s a record in surveys dating to 1990. Only 36% said the American dream— the idea that anyone can get ahead with hard work —still holds true, down from 53% who had said so about a decade earlier, another Journal-NORC poll found. In Wilmington, N.C., the Wiles family feels like they’re sliding backward financially despite pay raises and frugal habits.

Clayton, 44 years old, makes $10,000 more than he did three years ago in his job as a tow-truck driver, bringing the family’s annual income to $58,000. But the Wiles can’t afford to fix their broken-down truck and plan to draw from modest retirement savings to pay for health insurance for their two children when they lose Medicaid eligibility this year.

Haleigh, 30, is in school to become a teacher, but worries that even the addition of an extra salary won’t enable them to start saving for a down payment on a house.  The combination of higher borrowing costs and higher home prices has made buying a home much less affordable. New 30-year fixed-rate mortgages, though down about a percentage point from last fall, are close to 7%, compared with under 3% three years ago. The increase in rates means a borrower typically has to pay hundreds of dollars more a month for a house that costs the same.

“I don’t think the American dream still exists,’’ said Haleigh. “I don’t think it’s attainable anymore. Because you need money to make money, and I think you either start out ahead or you’re constantly playing catch-up now.”

Political skew

One factor in the downbeat outlook is that many Americans view the economy through a political lens. Their opinion is more optimistic when the party of their choice holds the White House. In the weeks before the 2016 election, only 11% of Republicans rated the economy as excellent or good, CNBC polling found. That jumped to 26% right after the election, even before Donald Trump was sworn in as president, and rose to 73% within a year. By contrast, Democratic views of the economy turned more negative over the same period.

Some analysts find signs that the partisan skew in views of the economy is particularly powerful now, with Biden in the White House, because Republicans are more likely than Democrats to adopt a negative view when their party is out of power.

“We find that Republicans cheer louder when their party is in control and boo louder when their party is out of control,’’ wrote Stanford University economics professor Neale Mahoney, who held White House positions under Biden and Obama, and Ryan Cummings, a Ph.D. student, in a November Substack posting.

By statistically “adjusting the decibel level’’ so that the two parties cheer equally, they found that about 30% of the gap between consumer sentiment and what would be predicted by the economic data could be explained by what they called “asymmetric amplification” of consumer sentiment according to a person’s political party.

In a complementary study, two Brookings Institution analysts found that news about the economy reported in legacy news media—big-city papers such as the Atlanta Journal-Constitution, the Washington Post and The Wall Street Journal—has been more negative than what would be predicted by actual measures of the economy. The San Francisco Fed’s index of daily news sentiment, which measures the positive or negative outlook of economic stories in news publications, had correlated well for several decades with measures of unemployment, gross domestic product, inflation and stock prices, according to research by Ben Harris, who was the top economist in the Biden administration’s Treasury Department, and Aaron Sojourner.

But in 2018, news sentiment turned more negative than the economic fundamentals, and the negativity gap has widened during the Biden administration. The study didn’t include broadcast media, such as Fox News or MSNBC, that are widely seen as tilted toward one party or the other. Nor did it prove that negative news caused lower consumer sentiment.

Michael Strain , director of economic policy studies at the right-leaning American Enterprise Institute, said that the economy as people experience it in their daily lives explains most of the disconnect. While he sees some mismatch between sentiment and economic fundamentals, he believes that the corrosive impact of inflation accounts for much of it given its broad reach and because people became accustomed to very small price increases in recent years.

“When people say they don’t feel good about the economy, we should believe them,” Strain said.

‘Dark clouds’

Arguello, the Nashville-area restaurant owner, got into the food-service industry in May 2020, early in the pandemic. After ending a 30-year career at General Electric , where he was most recently a senior executive, the 65-year-old decided to buy and operate a burger franchise with his son, a recent college graduate, as a way to teach him how to run a business while deepening his own roots in his community after years of travel.

The Mooyah burger franchise they opened was successful enough that they opened a second location. Fourth-quarter revenues in 2023 were 15% higher than in the prior year, Arguello said. Despite his personal success, Arguello said he believes that “the light at the end of the tunnel is not there yet” for a nation emerging from the pandemic and its high-inflation trauma. Many other nearby restaurants have recently closed, he said, and more broadly, he’s concerned that America is suffering because political leaders are putting their party’s needs above the country’s.

“You have this political instability, a world that is very unstable, with this economic uncertainty,’’ said Arguello, who is originally from Nicaragua. He considers himself right-of-centre politically and would vote reluctantly for Trump this year if he is the GOP nominee. “What people are sensing is not whether the inflation is becoming moderate,” he said. “It’s that the dark clouds remain.”