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SIMON BROWN: I’m chatting now with Maarten Ackerman, chief economist at Citadel. Maarten, appreciate the early morning. I want to kick off with the big numbers doing the rounds. AI capex spend in the US – well over $600 billion expected. Does it almost ensure that US GDP growth remains robust during the year if you’ve got $600 billion going into AI capex?
MAARTEN ACKERMAN: Good morning Simon. It is fascinating, the amount of capital that, that is sucking in at the moment. Given the fact that the US is way more competitive in that space, there’s no alternative. If we look at global capital flows in terms of going into that space, it all goes to the US. There’s a little bit going into places like Europe, India and where there are alternatives. That adds to the US competitiveness; it underpins corporate earnings and the markets.
You’re 100% right. That is definitely a major contributor now to the resilience of the US economy. Just to give you an idea in terms of contribution to US GDP, it’s typically 70% consumers. Now, almost a third of that is actually capex spend on AI. So suddenly it’s becoming not only a consumer-based economy but call it, if you like, a tech economy. That’s part of the reason why the tariffs didn’t really impact as much as most people expected.
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SIMON BROWN: Absolutely. There’s been very little impact on the tariffs. There has also been very little success in getting the debt down. They’ve still got the government debt as an issue – it’s frankly getting worse. Lower rates from the Fed might not do much, but a weaker dollar and perhaps some inflation does help. I’ve always thought this is an emerging market strategy. But if you’ve got a lot of government debt, well, weaken your currency, let some inflation run.
Is that a viable option for the US? Certainly, I’m looking at the dollar index, and we’re seeing dollar weakness. Trump doesn’t mind dollar weakness.
MAARTEN ACKERMAN: I know, we all focus on the US and we haven’t even noticed. Some people haven’t even noticed [the surge in] bond yields in Japan … recently.
That’s a developed market story where most of them are running huge excess debt, massive deficits, and we’ve seen across the board that long-term bond yields are going up for different reasons. Europe is more all fiscal spend on defence. But to answer you, in the US, yes, that’s been a long debate in terms of how sustainable this is. Trump with his ‘big, beautiful bill’ is likely to run a deficit in line with what we’ve seen in Covid.
Covid we understand – that was where they had to chip in to support households and get their economy going. They’re not in that kind of environment now – and still they are going on plan to spend the same kind of money. So yes, there’s a huge question mark. I have a question mark about sustainability.
But there is a big difference between emerging markets. If you think about SA, we get close to 80% [of GDP] and everyone’s up in arms. The US is already running north of 120% of GDP. That boils down – even in this environment where there are a lot of question marks around the dollar – to the dollar still being the reference currency. So investors are okay accepting those higher debt levels, given that interest payments happen in the reserve currency of the world.
I always say it’s almost like they’re very unlikely to default because they can print their payments. There is still enough demand for US dollars where they can manage those kinds of debt levels.
SIMON BROWN: They remain the reserve currency, and that is a huge benefit to the US and to the US dollar.
You mentioned Europe. You mentioned defence. Looking at Europe, the defence spending is certainly improving – I’m not sure sustainable. They don’t really have AI spend. They’ve high energy costs. Europe looks like a region that is going to frankly continue to ‘muddle along’, which is probably the phrase I’m looking for.
MAARTEN ACKERMAN: Yes. Unfortunately they’ve got a lot of things against them – an aging population, being way less productive compared to the US. They have no advantage in the tech AI space. They are between the Chinese dumping cheap products in their markets and the US putting tariffs on their products. So they’re really getting squeezed there. By the way, they sold a lot of vehicles into China, which has now stopped because the Chinese are just producing their own. So they are going to battle.
Fortunately consumers in Europe are slightly more positive for some reason, compared to their counterparts in the US. Unemployment is fairly well contained, and their financial situation looks reasonable. So at least there is a bit of a consumer story there. But for the rest – the industrial engine in Europe – I agree, they’re really going to struggle to get up.
The bit of activity we saw last year is exactly just defence. They’ve had huge fiscal spend. Touch wood, it’s probably going to be a once-off because, if you start building tanks and bullets and you don’t use them, it’s a once-off kind of spend – and that’s a concern. If you had that similar kind of fiscal support and it went into long-term infrastructure and productive assets, then you could start building a case for high growth potential for Europe.
But we unfortunately think that Europe will keep lagging [behind] places like the US in terms of their growth potential.
SIMON BROWN: Yes. I hadn’t thought about that around defence spending. Assuming there’s no war, it is one-off. You’ve built that tank, you’ve now got that tank.
Martin Ackerman, chief economist at Citadel, I always appreciate the early morning time.
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