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Latest in AI: Nuclear switch; Nobel moment; AI in finance; AMD vs Nvidia
It’s fast looking like the first industry AI will disrupt is not technology but energy.In this edition of "Latest in AI", we analyse moves by Big Tech to resuscitate a nuclear energy industry that has stalled since the heyday of the 1970s and 1980s as they scramble to meet the electricity needs of their AI-driven data centers. We also examine why last week's AI Nobel prizes matter; AI risks to the financial system; and why it's so hard for rivals to chip away at Nvidia's dominance in AI.
The intangible silver lining
German growth has fallen behind other G7 economies. Most concerningly, investment in physical capital has contracted more sharply than elsewhere. At the same time, however, German investment in intellectual property has grown at a higher rate than in other G7 economies. In our view, this illustrates that German companies are rapidly gearing their business models toward high-margin and high-tech activities.
Corporate Bond markets in Europe – a structural perspective
The European economy is facing huge investment needs in order to foster innovation and to strengthen competitiveness. Markets could provide more funding, as a comparison with the US shows. Concluding our mini-series on European capital markets, in this note we will shed light on the role of debt securities. Debt securities issued by non-financial corporations in the EU amount to EUR 2 trillion, of which EUR 1.7 tr is in the euro area, but there are pronounced differences between countries.
Exports to China have become less important
In the second half of the last decade, Germany’s exports of goods to China grew faster than those to any other major trading partner. While German goods exports to China rose by 34% in nominal terms between 2015 and 2020, German exports to all other countries (excluding China) decreased by 1%. As a result, the market share of China in German exports climbed from 6% in 2015 to almost 8% in 2020, making the country the second-largest German export market destination at that time. Since then, however, German exports to China have become less important. In the first seven months of 2024, the overall share in total exports came down to 6% again.
Pause for breath
Pause for breath. After one of the most extraordinary periods in market history, Chinese markets closed for the Golden Week holiday with the CSI 300 having surged 26% in the previous six trading days. That is a generational move for either that index, the S&P 500 or Stoxx 600.
Latest in AI: Eye-popping valuations, growing pAIns and the itch to regulate
If you think Nvidia’s shares are expensive, take a look at how much investors are shelling out for a stake in the private companies at the heart of the AI frenzy. Sometimes it seems like there’s a unicorn born every minute.
German wage pressure is easing
The pronounced decline in consumer price inflation (nat. definition prelim. Sep: 1.6% yoy) and the observable cyclical slowdown in the German labor market (recently discussed using the Beveridge curve) are dampening wage pressure. This is shown by our wage pressure index, which correlates quite nicely with year-over-year growth in effective pay in the overall economy. Effective pay (gross wages and salaries per employee) reflects what employees actually receive in their paychecks.
The Crypto Ocean : Surges and Swells
2024 has so far been another year of dramatic surges and surprising swells in the crypto ocean, highlighting both the volatility and the enduring potential of this evolving asset class.
This downturn is different
Germany's much-discussed industrial crisis came to a head last week with VW's announcement of potential factory closures in Germany. This would be an unprecedented step in the company's history. The hard data on industrial production — again weaker in July as we noted last week — are also consistent with German industry undergoing the most pronounced downturn in the history of the Federal Republic. Yet, this downturn continues to look different from previous ones — in both good and bad ways.
Construction recession could end in 2025
The construction sector has been experiencing a severe recession since 2021. The adjustment to a new equilibrium is under way but is not yet completed. Our nowcasting model indicates that the contraction should continue in H2 2024. For 2025 some leading indicators as well as some political measures such a higher depreciation and subsidies for social housing point to an improvement. We expect the recession to end in H2 2025. The biggest risk to this forecast is that investors will be deterred by the elevated political uncertainty.
Latest in AI: Five clues to the future of AI in recent headlines
AI is as hot a topic as ever, by far outpacing virtual reality, the metaverse and even crypto in internet searches.Recent headlines offer five clues to the future of AI as the world buckles up for the rest of the year.
German auto industry: Too much gravity
Volkswagens’s recent public considerations to possibly shut down plants in Germany and lay off employees for operational reasons came like a bombshell. Nevertheless, we have been pointing out for some time that the balance between production and employment in the automotive industry in Germany is disturbed. Currently, domestic production (production index) is almost 23% below previous highs. Although employment has also fallen in recent years, the decline versus the former peak is, at -8%, significantly smaller. This indicates a fall in productivity.
European securitisation market – ready for a comeback?
A well-functioning securitisation market could help to unlock capital to fund Europe’s economy and its green and digital transition. The bundling of loans into a tradable security can act as a funding tool for banks and/or allow them to transfer risk to investors, thereby creating additional lending capacity. The European securitisation market has been stagnating since the financial crisis. Issuance has been fluctuating around EUR 200 bn per year. This is much lower than in the US, where average annual issuance has been about EUR 2 tr in the period 2013-23. Renewed political support, stronger push factors in the form of looming higher capital requirements for banks and the winding-down of central bank refinancing as well as a more benign macroeconomic environment all provide tailwinds for the securitisation market. However, without targeted regulatory measures, a meaningful pick-up in securitisation volumes will probably remain elusive.
No Sahm without Okun
Despite its perfect track record in the US, the Sahm rule has few proponents in Germany. Applied to Germany, its track record would have been poor for the 21st century, flagging the 2008 recession after it was over and signaling a recession in 2004 that did not happen. In the 20th century, however, the Sahm rule would have been a very useful recession gauge in Germany, as in the US. In this report, we examine why it stopped working and what could replace it.
German consumers are still sceptical
German households are taking home higher real incomes again after three years of seeing their purchasing power decline. In light of these income gains, however, private consumption remains disappointingly anemic. While retail sales data have not been released since April for technical reasons, survey data and anecdotal evidence suggest that the pick-up in consumption we and other forecasters expected to see this year has not yet materialized. German thriftiness stands in stark contrast to the US, where households have been consuming significantly more out of real income gains, despite these income gains no longer being higher than in Germany. In real terms, German household consumption has fallen about 13% behind US levels since the pandemic, whereas disposable incomes have more or less kept up. This gap probably widened further in Q2. What explains that?
Latest in AI: Higher costs, SearchGPT, Nvidia's China chip
Concern about a lack of much evidence that higher AI spending is translating into conspicuous returns helped trigger a near 6% average drop in the seven Big Tech stocks in the US last week. That was their largest daily loss since September 2022, before OpenAI’s ChatGPT went live in November of that year.Later on, we analyse OpenAI’s unveiling of SearchGPT and show how the “Google killer” argument looks overplayed. We then discuss reports that Nvidia is working on its fourth sanctions-compliant chip for China.
It's stuck
The data available so far for Q2 and Q3 indicate that Germany's economic recovery has lost momentum over the summer. The PMI and ifo data this week disappointed and point to a sluggish recovery in the German economy at best. Manufacturing is hurting from weak domestic investment, and the recovery in global demand faces growing downside risks. Private consumption remains disappointing in light of strong real income growth. Overall, the recent data and the global outlook are not good enough to support our current growth forecast for 2024. We expect that the German economy expanded by 0.2% qoq in Q2 and will stay on this sequential growth rate for the rest of the year. This adjusted quarterly growth profile reduces our annual GDP forecast for 2024 to 0.2%, from 0.3% previously. The risks however are skewed towards complete stagnation.
Germany: The end of the single-family home?
Homes are often unaffordable in large cities and metropolitan regions. Due to a lack of space and housing, fewer single-family homes are being built. This trend is likely to continue. In addition, climate and environmental protection targets are expected to make the construction of such homes even more expensive. However, single-family homes will likely continue to be built in many small communities. Hence, the trend towards a lower number of new single-family homes will probably be broken in the long run.
Taking stock of the latest fiscal decisions: Still lots of uncertainty
Although the growth initiative contains some promising ideas to revive the economy, it remains to be seen whether the resulting positive effects can be reaped to a significant extent as early as in 2025, as assumed by the government. In our view, the projected GDP effect of +0.5% as well as the expected savings in the basic welfare benefits for job seekers (Bürgergeld) of a good EUR 5 bn appear to be rather on the optimistic side. As for the hard numbers, the revised budget for 2024 now targets federal core budget spending of around EUR 489 bn (11.5% of GDP), which implies an increase of about EUR 12 bn (0.3% of GDP) compared the initial budget draft. For 2025 the government targets spending to decrease by a good EUR 8 bn (0.2% GDP) to roughly EUR 481 bn, leading to a moderate negative fiscal impulse from the federal core budget. Even if the latest decisions have resolved the budget dispute within the coalition government for the time being, the struggle over the federal budget is likely to just enter the next round in the parliamentary process. There are still open consolidation needs of up to EUR 17 bn (c. 0.4% of GDP), which will have to be closed in the further parliamentary consultation process and in the subsequent budget implementation phase during 2025.
Latest in AI: reasoning AI?, Trump, new start-ups
OpenAI is developing AI technology that may be able to plan and reason – one of the Holy Grails of AI. Meanwhile, the ‘godmother of AI’ Fei-Fei Li has created a billion-dollar start-up. In this ‘Latest in AI’ edition we analyse how AI may become another ‘Trump trade’ as Republicans promise to scrap restrictions. We then explore more AI startups.
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