Tilmann Galler is global capital markets strategist at JP Morgan Asset Management in Frankfurt.CASEY MOORE
interview
Europe missed the early stages of the AI revolution. But it won’t be a big Disneyland. Tilmann Galler, global capital market strategist at JP Morgan Asset Management in Frankfurt, explains why this is the case.
Tilmann Galler, what scares you more right now, the Iran war or AI?
When it comes to uncertainty regarding energy supplies, the Iran war is certainly the greater risk. With AI, however, opportunities open up.
What are you thinking about specifically?
Of the productivity increases, which can also be a recipe against inflation. However, we are still in a development phase, so of course there are risks. American companies like Microsoft, Meta, Alpha & Co. alone will invest $700 billion this year. These are the largest sums of money ever invested in technological progress, and it is not certain whether these investments will one day pay off.
Invest huge sums: Microsoft & Co.Image: keystone
There is currently growing fear that this is an over-investment.
That remains to be seen, but as mentioned, we are still in the development phase. The manufacturers of hardware, chips and memory are currently benefiting greatly. This has led to an unprecedented boom in the semiconductor industry.
Isn’t this a purely American story?
No, it is now spreading to Asia. This means that the “Magnificent Seven” (Amazon, Apple, Meta, Microsoft, Alphabet, Nvidia and Tesla) are no longer as glorious as they once were. Your lead is decreasing and you can also see that the enormous investments are eating into the cash flow. This in turn could have consequences for shareholders, namely fewer share buybacks and smaller dividends. Some software companies are also coming under pressure because of AI.
At the same time, resistance to AI is growing among the population. Various American cities refuse to allow data centers to be built on their property.
Water and electricity are therefore becoming more expensive. The issue of resource consumption must therefore be taken seriously. Because this means that the already enormously high costs will continue to rise, this increases the financial risk. At the same time, there is also the risk that there could be bottlenecks, especially in the power supply. For these reasons, data centers cannot be built as quickly as one would like. Cost and time are currently the two most important risk factors. But still: An enormous amount of money is still being made in this area.
The Economist just warned in a cover story that there will be massive job losses and that we are very ill prepared for them. Is this scaremongering?
There will be some professional groups that will be challenged. But this was also the case with previous technical revolutions. Just think of how many jobs automation has eliminated in industry. AI will lead to structural change and may result in some disruption.
“In general, large productivity gains can be achieved in almost all economic sectors thanks to AI.”
Today, however, this does not affect unskilled workers, but increasingly also university graduates.
But new opportunities are also developing. We don’t have enough craftsmen or nursing staff. There is still an enormous need for skilled workers. That is why we are far from mass unemployment.
But the AI models are getting better and better at a rapid pace.
Nevertheless, AI cannot do everything. These models are still far too dependent on people for autonomous action.
When it comes to AI, Europe has been left behind by the US and China. Can this deficit ever be made up?
Europe has already fallen quite a bit behind in this development phase of AI, although there are isolated exceptions such as the Dutch company ASML, which is essential for the production of the highest quality chips. But the so-called hyperscalers, the leading tech companies, are all in the US. Europe also has too few data centers.
Unpopular: data center.Image: www.imago-images.de
How bad is that?
Fortunately, a lot is happening in Europe too. Data centers are being built and regulations are being adapted and standardized. What is most important is that the infrastructure is built. AI needs a lot of electrical energy. At the same time, the demand for electricity is also increasing due to the ecological restructuring of society. Just think of the electric cars.
Where do you see the potential in Europe?
Once the infrastructure is in place, I see great opportunities in the medium term in the application of AI, be it in the pharmaceutical industry, in bio-tech or in the financial sector. In general, large productivity gains can be achieved in almost all economic sectors thanks to AI.
So Europe won’t become a big Disneyland, as Americans like to scoff at?
We were left behind in the development phase. But in the application phase, Europe has many very attractive business models to offer. And let’s not forget that a lot has improved in Europe in recent years, especially in the much-maligned financial industry. This is often overlooked in the euphoria about tech companies.
Europe is under pressure from Putin and Trump. Does this double pressure mean that a lot of reforms are now being carried out?
We share this assessment. Europe is moving closer and growing together. It has been recognized that everyone has little chance on their own. There is a change in thinking, even if unfortunately it is sometimes still happening too slowly.
“In our base scenario, we assume that we will have some scars because of the Iran war.”
As a Swiss, I have to ask you now: Do we also have to move more towards the EU?
Switzerland is part of Europe and closer cooperation is helpful for everyone. This applies to Switzerland as well as to the United Kingdom.
Do you share the general pessimism about Germany, Europe’s economic locomotive?Germany benefited from Agenda 2010, Gerhard Schröder’s reform package, and also from the fact that its cars and machines were in demand in Asia, especially in China. However, free trade and globalization reached their peak when Trump first took office. At the same time, Chinese industry has made tremendous progress.
Today, Made in China stands for high-quality things.
This makes the structural weaknesses in the German economy visible. After the financial crisis, Germany did not implement enough reforms that would have helped the economy. It has also underinvested in infrastructure and defense.
Is the austerity policy, the “black zero” of the late Finance Minister Wolfgang Schäuble, now taking revenge?
The Anglo-Saxon economists in particular have always warned against this.
That’s changing now. If there is one G7 economy that can afford a little more deficit, it is Germany. And they do that too.
Father of German austerity policy: Wolfgang Schäuble.Image: Kaltura://1789921/178992100/94000/1_ag5tfl52
However, against considerable resistance.
Vigilance does no harm, but the direction is right. What is most important is that the money is invested appropriately, i.e. primarily in infrastructure and defense. From this perspective, we welcome the German government’s change of course, but we also observe it critically.
Let’s talk about the Iran war. Are fears of a recession, or even a depression, exaggerated?
When it comes to transport routes, the clock is ticking. From an economic point of view, many people have an interest in reaching an agreement as quickly as possible. If it takes too long, a recession cannot be ruled out. However, this is not currently the case.
It is difficult for laypeople to understand the fact that we are experiencing a stock market boom and at the same time consumer sentiment is in the basement. How long can this continue?
There must be a correction, but the question is on which side. If there is a relaxation on the energy side, then consumer sentiment will also brighten again. Consumers are currently stressed by rising energy costs.
This will not change much quickly even after the Strait of Hormuz is opened.
Yes, but it is important American consumers who are currently benefiting from the tax relief from Trump’s Big and Beautiful Bill.
Danger to the global economy: A gasoline price in the USA of over five dollars.Image: keystone
However, this money is eaten up by higher gasoline prices.
If the price of gasoline in the USA exceeds the 5 dollar mark, then things will become critical. However, if it falls back to the 4 dollar mark or even below, then an easing can be expected. But let’s not forget that the American labor market has been surprisingly robust so far.
All in all, how do you see the global economy developing by the end of this year?
Our base case is that while there will be some scars from the Iran war – overall growth will slow somewhat – recession risks are low unless there is further escalation in the Middle East.