Europe and Japan reach trade deals with the U.S. but their economic slowdown is likely in 2H25. China may need to rely more on consumption.
Europe
Europe reached a trade agreement with the U.S. just before the August 1 deadline. However, tariff hikes could cause a greater economic slowdown and pave the way for further rate cuts in 2H25. At its July 24 meeting, the European Central Bank (ECB) decided to keep its policy rate unchanged at 2.00%, amid inflation stabilizing near its 2% target.
The U.S. and Europe reached an agreement just before the August 1 deadline, under which import tariffs on European goods were reduced to 15% (from the previously threatened rate of 30%). In return, Europe agreed to open its markets to U.S. goods by reducing tariffs to 0%, and committed to purchasing USD750 bn worth of energy from the U.S., investing another USD600 bn in the U.S., and buying U.S. military equipment. However, other tariffs—such as those on steel and aluminum—remain unchanged at 50%. The negative impact of tariffs—significantly higher than last year—is expected to hit European economy, strengthening the case for the ECB to resume rate cuts. Krungsri Research expects that the ECB may cut its policy rate by another 50bps to 1.50% by year-end.
Japan
The trade agreement with the U.S. helped reduce downside risks to the Japanese economy in 2H25. In July, the preliminary Manufacturing PMI returned to contraction territory at 48.8, down from 50.1 in the previous month. Meanwhile, Tokyo CPI slowed for the second straight month to 2.9% YoY, falling below 3% for the first time since March.
Japan reached a trade agreement with the U.S., under which all goods, including automobiles, will be subject to a 15% retaliatory tariff—down from the previously threatened 25% rate. In return, Japan agreed to import key U.S. products such as cars, trucks, and other agricultural goods. This deal is seen as reducing downside risks to Japan’s economy. At the same time, although the ruling party lost the upper house election and now holds a minority in both houses of parliament, PM Shigeru Ishiba insisted he would not resign, easing concerns over a potential political vacuum. Nevertheless, given Japan’s sluggish growth and increasing pressure from U.S. tariffs in 2H25—alongside easing inflation—Krungsri Research expects the BOJ to maintain interest rates through the end of this year.
China
China’s economy may need to rely more on consumption in 2H25 to maintain growth momentum. In 2Q25, consumption contributed 52% to GDP growth, while net exports accounted for 23%—a sharp fall from 40% in 1Q25, in line with weaker exports during May–June. Meanwhile, the government has launched a mega dam construction project in Tibet worth CNY 1.2 mn.
China’s exports in 2H25 are likely to weaken due to the trade war, stemming both from direct U.S. tariffs on China and U.S. tariffs on ASEAN countries, which China has used to reroute its exports. Thus, China may be unable to rely on exports to support growth as much as in the past and may need to turn more toward consumption. However, fundamentally, consumption growth remains subdued and relies on stimulus. Although consumer confidence has improved to some extent, it remains 30% below pre-COVID levels. In 1H25, per capita income grew 5.3% YoY, lower than the 8–9% seen during 2017–2019. Thus, looking forward, the government should focus on increasing household income by restoring wealth tied to the property sector and stimulating investment for continuous employment.
Keep an eye on Thailand–U.S. trade deal: A crucial factor shaping Thai investment and export prospects
Thai export value in June grew at a double-digit rate for the 6th consecutive month. A 36% tariff scenario could cost THB 164 bn in Thai export losses. The Ministry of Commerce reported that Thai export value in June reached USD 28.6 bn, marking a 15.5% YoY increase. Excluding oil-related and gold products, exports grew by 15.6%. Key export items that saw significant growth included computers & accessories, hard disk drives, electronic circuits and agricultural products—especially fresh, chilled, frozen, and dried fruits, which rebounded strongly. On the export destinations side, most major markets posted solid growth, particularly key partners such as the United States, China, the EU, and ASEAN. For the first half of 2025, total export value stood at USD 166.9 bn, up 15.0% YoY.
Thailand’s export outlook for the second half of the year faces significant downside risks. Although exports to the U.S. surged by 29.7% in 1H25, it was driven largely by front-loaded orders ahead of the higher tariffs set to take effect on August 1. This stockpiling effect raises concerns of tariff impacts in the coming months. Krungsri Research estimates that if Thailand fails to negotiate a reduction in U.S. tariffs—resulting in Thai goods facing a 36% tariff, significantly higher than key competitors in ASEAN and major economies (which face rates of around 15–20%)—the country could suffer a long-term export loss of -1.55%, equivalent to THB 164 bn (or 0.88% of GDP). This impact is notably greater than the current situation under the 10% tariff rate, which causes an estimated loss of -0.65%. With no-deal tariffs at 36%, Thailand’s export losses will worsen—second only among ASEAN in terms of changes in negative impact compared to the 10% tariff scenario (see chart).
Investment through the BOI shows some positive signs amid concerns over trade wars and geopolitical tensions. The Board of Investment (BOI) reported that in 1H25, Thailand received 1,880 applications for investment promotion, a 38% YoY increase, with a total investment value of THB 1.06 trn (+138% YoY). Key sectors with high investment value included digital, electronics & electrical appliances, automotive & parts, renewable energy generation, and agriculture & food processing. Foreign Direct Investment (FDI) accounted for 1,369 projects (+59%) with a total value of THB 740 bn (+132%), led by investors from Singapore, Hong Kong, and China.
A rise in both the number of applications for BOI privileges and their value of investment in the first half of the year signaled a positive outlook for private investment recovery. However, based on structural issues, investments remain concentrated in a few sectors, led by large-scale data centers. While this industry holds long-term potential, it may not generate widespread value-added benefits or employment across the domestic supply chain. In addition, the uncertainty surrounding U.S. tariff policies remains a key structural pressure that could influence investment decisions—especially in industries reliant on exports and global supply chains. If Thailand fails to negotiate a reduction in the reciprocal tariff from 36% to a level closer to that of regional competitors (mostly around 19–20%), it could undermine the competitiveness of domestic producers and delay future investment decisions. Moreover, recent tensions between Thailand and Cambodia could further dampen investor sentiment in the current environment.
