EU Economy Expecting a Recovery Phase

The world economy is on the downturn phase right now. Almost all the developed countries, including EU members, will see their economy, say, stagnated for at least this year, mainly because of the various tariffs imposed on different countries and sectors by the Trump administration. That is how Senior Economist at the Center for Macroeconomics at the ITOCHU Research Institute Inc., Sota Takano, also Certified Member Analyst of the Securities Analysts Association of Japan, describes the current economic outlook to Diplomacy&Trade.

The downturn phase in the global economy began its impact this summer and it is likely to last for a year or so. After that, because of the base effect, the economy will experience a recovery again next year, the expert predicts. Of course, all this affects the EU economy as well. “Right now, the automotive sector in Germany and other manufacturing sectors in the EU are facing difficulties. These were about to get into the recovery phase from the start of this year but, because of the Trump tariffs, they face difficulties again.” He expects the recovery of the EU economy and specially the manufacturing sector from the middle of next year.

Germany as reference
The strongest economy in the European Union is that of Germany. Hungarian government officials often claim that Hungarian economic difficulties are due to the German economy doing worse than expected. In that respect, Sota Takano is of the view that for the rest of this year, Germany will be behind countries like France or Italy, Spain, mainly because Germany's economy largely depends on the automotive sector and the Trump tariffs will impact the automotive sector the most compared to other services and other consumption. “However, conditions are likely to improve from the end of this year or early next year because the German government changed their fiscal policy, turning more onto the spending stance, especially for the defense sector and also infrastructure. So, that will boost the German economy from next year for the upcoming three or five years. Thus, Germany will be in a better situation compared to France or any other countries.”

Higher defense spending
Due to the Russian aggression in Ukraine and the growing Russian threat to the security of EU member countries on the eastern flank, the European Union has begun putting more emphasis on defense, which means higher spending. The economic expert believes that even though, the conflict is likely to end peacefully sooner or later, the importance of the defense sector will be getting bigger and bigger because with its transactional approach, the current administration of the United States does not really want to put money and any resources to defend the EU and European countries. Thus, European countries will have to defend themselves and the way to do that is to develop their defense sectors, which obviously means investing more money in this area. He notes that even if they are using American technology or American weapons, that will cost money as President Trump charges them even if that does not exactly fall in line with NATO solidarity…

Economy and politics
During the conversation with Sota Takano, the name of President Trump, and the tariffs in general, come up several times as his frequently changing policy are likely to have an impact on the European economy or the European Union as a whole. “I can imagine how difficult this situation may be for EU officials because it's really different from the traditional Western way to negotiate or cooperate. That is because 27 EU countries have to agree on what to do with US only, of course, in itself. Naturally, the tariffs are not really good for the economy, but this policy also affects the political association. As you know, in the European countries, there are so many far-right political parties, they are getting more powerful and gathering more support from the citizens. That doesn’t make the situation easier, either.”

New global situation
Speaking of more political lines formulating in the world, one can see Russia, China, and somewhat surprisingly, India, forming a kind of possibly economic alliance as opposed to the West. As to how these different political and economic lines could possibly work out from the perspective of the European Union, Sota Takano notes that the case is the same as the relationship with President Trump and his policies. “It's not really comfortable for the European Union and its leaders because, at least for now, the EU is possessing a considerable power in making new rules in the world in many ways, including the environmental or AI policies. But as you know, from the perspective of economic size and also the population, the European Union – just like the United States and Japan – is losing power in the world, not only in terms of economic balance but also politically, making the rules. Others like India, China, and less of, let's say, global South countries like Africa, South America, they will definitely have larger power. I think it's not something the EU can change but it needs to have to adjust more to the new global situation. But it's not the only one to do that.”

Hungary welcomes Japanese business
These volatile international circumstances require day-to-day monitoring of the situation on the part of Japan as well. As to how the economic expert sees the present and future of Japanese business relations with the European Union and with Hungary in particular, he points out that “globalization is slowing down, mainly because of President Trump and his policies, but as I mentioned, others, like China, are also having more power and influence. Both the European Union and Japan are in favor of free-trade. They believe that free trade is profitable for all parties involved. So, we can strengthen our relationship, not only in the economic area, but also politically – on the field of rulemaking or any other.”
He adds that this will also, of course, affect the business sector, the private sector in a good way and it is really much easier to do business in the different economic fields this way. Regarding Hungary, he believes there is a very big chance from the Japanese business perspective. “The past two years have not been really going well in this respect but the Hungarian economy is currently growing faster than EU average and doing much better than the Japanese. I think lots of Japanese business are seeking new markets outside of Japan and Hungary is, of course, one of the countries with big opportunities for doing new business with the government really welcoming foreign investments with incentives.”