Looking back at 2024, the economic performance of the Eurozone and Japan has been largely in line with our projections at the year’s outset. On the macro side, with the European Central Bank (ECB) kicking off a rate-cutting cycle and the Bank of Japan (BOJ) embarking on its first rate hike in years, the annual GDP growth rates of both economies have returned to positive territory. Meanwhile, equity markets in Europe and Japan both hit record highs in the first half of the year but faced increased volatility in the second half, driven by risks like the French and Japanese national elections and concerns over yen carry trades.
Over a longer-term horizon, as shown in the chart below, over the past decades, Europe and Japan have seen a persistent decline in terms of the share of global GDP and stock market cap they contribute. The trend not only reflects the underperformance of their equities but also the long-term competitiveness challenges both regions face. In the new article of our 2025 Economic Outlook Series, we delve deeper into the structural economic issues facing Europe and Japan, focusing on how long-term supply chain shifts, the Trump 2.0 presidency, and AI trends could affect their economic outlook, and also sharing our 2025 investment outlook for these two markets
I. Factors Weighing on Europe & Japan: Competition from China, Auto Industry Slump, and Missing Out on Productivity Gains
As highlighted in our past analyses, a unique characteristic of the ongoing manufacturing cycle is the uneven developments across regions and sectors. For instance, as shown in the second chart below, while industrial production indices in economies like Taiwan and South Korea have seen substantial growth compared to the pre-pandemic levels, Europe and Japan have experienced a sluggish recovery, yet to return to pre-pandemic levels. In fact, Germany’s industrial production index has declined by 13% relative to pre-pandemic levels.
Given the significant weight of manufacturing in GDP of Europe and Japan, the weak performance of their manufacturing sectors has been a primary factor behind the decline in both economies’ share of global GDP. Further analysis reveals that Europe and Japan face many similar challenges, including lackluster recovery in the automotive industry, declining semiconductor equipment sales, and heavy dependence on the Chinese market. Together, these factors have dampened the economic growth momentum of both economies over the past few decades.
1. Sluggish Auto Sector Recovery and the Rise of Chinese Automakers
The weak performance of the manufacturing sector in Europe and Japan can be attributed in large part to the sluggish growth in their auto industries. The key contributing factors include: 1) China’s position as the world's largest auto market, 2) supply chain diversification efforts by automakers in response to the pandemic, chip shortages, and the Russia-Ukraine war, and 3) China's edge in critical electrical vehicle (EV) battery technologies, which, combined with relaxed restrictions on foreign investment, has prompted automakers to ramp up investments and establish R&D centers in the country.
These trends are already reshaping the global automotive production and trade landscape. Leveraging the rapid growth of its EV industry and aggressive pricing strategies, China has emerged as the world’s largest auto exporter, surpassing traditional leaders like Germany and Japan. The supply chain disruptions have hit Europe hardest, where the trade deficit with China has doubled from pre-pandemic levels. Germany’s auto exports have also fallen by 30% compared to the 2015–2019 average, and Japan’s auto exports have declined by 10%.
Turning to the global auto market, this year’s trends have largely mirrored the same patterns as last year. Looking at the revenue performance of automakers around the world for Q3 2024, while U.S. automakers posted a year-on-year growth of 8.0% (vs. 6.8% in the previous quarter), European, Japanese, and Chinese automakers all saw negative revenue growth, declining by 6.7%, 11.1%, and 8.0%, respectively. The decline in revenue growth for Chinese automakers is primarily due to the high base effect and price cuts, while Japan and Europe are grappling with intensified competition from Chinese automakers and challenges in boosting EV market share.
2. Missing Out on the Current Productivity Cycle, with Semiconductor-Related Sales Heavily Dependent on the Chinese Market
Besides losing ground to Chinese competition in the auto industry, Europe and Japan have also been falling behind in the latest productivity cycle, leading to more long-term and structural economic challenges. As highlighted in our latest video about productivity cycles, the ongoing productivity cycle began in 2013 with the explosive growth of smartphones, 4G networks, and related app applications and was later propelled by the boom of EVs, cloud services, 5G, and AI in recent years. Economies with a crucial role in the supply chains of these innovations, such as the U.S., Taiwan, and India, have enjoyed notable growth in both their economies and stock markets.
In contrast, Europe and Japan failed to keep up right from the start during the smartphone era, as evidenced by the decline of Nokia, once the world’s largest mobile phone brand, and the fact that Japan’s Sony now accounts for less than 1% of global smartphone sales. The EV sector of these economies faces similar challenges, with Japanese automakers completely absent from the top ten global EV makers by sales. As for European automakers, though the major brands do have EV offerings, they have struggled to compete with Tesla and lower-priced Chinese brands, leading to a declining global market share.
Looking beyond consumer products, a defining feature of the ongoing productivity cycle is that nearly all the innovations involve semiconductor chips. Focusing more on upstream raw materials and semiconductor equipment in the industry value chain, Europe and Japan have experienced lagging growth in production and sales compared to other regions, causing the two regions’ share of global semiconductor-related sales to drop from 20% in 2000 to just around 8% today.
Even in the upstream segments where the two economies hold a strong position, they face the challenge of being overly reliant on the Chinese market for revenue. For example, nearly 50% of Japan's semiconductor machinery exports go to China. Similarly, in its latest earnings report, ASML, Europe’s largest semiconductor equipment maker, reported that China accounts for nearly 40% of its revenue. This dependency not only leaves Europe and Japan more vulnerable to shifts in China’s economic conditions, but also expose them to potential impacts from U.S. efforts to limit China’s supply chains.
II. Key Risk in 2025: How Trump’s Trade Agenda Could Impact the Auto Industry
According to data from the U.S. Department of Commerce, passenger vehicles are the largest category of imported goods in the U.S., making them a likely target for new tariffs under the second Trump administration. In fact, the Section 232 auto investigation by the Department of Commerce in 2019 concluded that imports of automobiles and certain automotive parts pose a national security threat. While Trump did not impose new tariffs on imported vehicles at the time, focusing on targeting China instead. In late November, the president-elect has signaled on social media that he plans to impose a 25% tariff on imports from Canada and Mexico, and an additional 10% tariff on China. This suggests an increased likelihood of...
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