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SPI Management Newsletter 25.08.23

Germany's Uphill Battle to Shed 'Sick Man of Europe' Label

Recently, Germany has been faced with economic challenges that have led to its recurring label as the "sick man of Europe." While some argue that this tag doesn't accurately depict the economic powerhouse that is Germany, others see validity in the claim. The nation was first labeled as such in the late '90s during post-reunification struggles. Today, forecasts predict that it will be the only G7 economy to contract in 2023, reviving the term in media narratives.

Contrarily, some experts highlight Germany's record employment levels and job vacancies, arguing that its current state is nowhere near the "sick man" description. Though the country slipped into recession in early 2023, the contributing factors are different from previous instances. These include not only global economic downturns but also specific geopolitical stressors affecting Germany.

The economic challenges facing Germany can be divided into short-term cyclical issues, influenced by global conditions like China's sluggish post- Covid recovery, and longer-term structural issues originating from within the country. For instance, Germany relies heavily on manufacturing exports like cars and machinery, sectors which are more vulnerable to economic downturns compared to service exports that other nations specialize in. Moreover, Germany's trade balance has shifted, recently showing a foreign trade deficit for the first time in decades. Despite reverting to a trade surplus, export growth remains weak. The economy is also affected by other internal issues, such as declining work hours and an aging population straining the pension system. Despite these challenges, there's no comprehensive government plan to address structural problems, including the need for tax reforms, lesser bureaucracy, and improved infrastructure. High energy costs have also led to concerns that German businesses may relocate, exacerbating economic problems. With multiple factors at play, Germany may find it difficult to quickly shed its "sick man" reputation.

Nvidia's AI Business: A Decade in the Making and Still Going Strong

While Nvidia's recent boom in the artificial intelligence (AI) sector might seem like a sudden success to some, the reality is quite different. Nvidia has been quietly laying the foundation of its AI capabilities for over a decade, starting as early as 2006 with the introduction of its Cuda programming language. Since then, the company has transitioned from being primarily focused on gaming to becoming a dominant player in AI and data centers. This transition was evident in its most recent fiscal quarter, when Nvidia reported an eye- popping $13.5 billion in revenue—nearly double what it was during the same period last year.

The data center business has been a particular star performer for Nvidia, contributing $10.3 billion in the most recent quarter. This was a substantial leap from the $4 billion in revenue just six months prior. The growth has not only exceeded Wall Street expectations but also boosted Nvidia's stock, leading the company to be the first chipmaker valued at more than $1 trillion.

Notably, Nvidia's projections indicate that this incredible growth trajectory is far from tapering off. The company's forecast for the upcoming fiscal quarter stands at a near $16 billion in revenue. Chief Financial Officer Colette Kress pointed out that the company's "demand visibility" extends well into next year. Nvidia expects to meet rising demand by increasing the availability of its highly sought-after chips in the coming quarters.

Nvidia's influence in AI doesn't stop at its own business metrics. Major technology companies, including Microsoft, Amazon, Google, and Facebook, are signaling significant capital investments in generative AI capabilities, further fueling demand for Nvidia's advanced chips. Microsoft alone had a record $8.9 billion in capital expenditures for the June quarter, much of which is aimed at boosting investments in "AI infrastructure." In summary, while Nvidia may face increased competition in the future, its strategic long-term vision, supported by strong demand for its innovative AI systems and a robust financial performance, suggests that Nvidia will continue to be a leader in the AI industry for years to come.

Adapted from WSJ, FT, NYT, Reuters, CNBC, Bloomberg

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