The Global Economy and AI Investment – What’s the Deal?
Many economists are predicting that generative artificial intelligence (AI) is about to transform the global economy. These predictions are backed by various research studies and comments from experts. For example, a study published by Epoch, a research firm, suggests that explosive growth and a rise in GDP is plausible with AI capable of broadly substituting for human labor. Similarly, Erik Brynjolfsson of Stanford University predicts that AI will power a productivity boom in the coming years.
However, in order for this economic transformation to happen, firms need to spend big on software, communications, equipment, and factories, enabling AI to integrate into production processes. Many previous breakthroughs, such as the tractor and the personal computer, required an investment boom to spread across the economy. While there is excitement about the potential of AI, there is still little sign of an investment boom when it comes to AI technology.
The situation for AI investment was sluggish prior to the COVID-19 pandemic, but saw a temporary increase as lockdowns lifted. However, later in the year, global capex spending slowed down due to geopolitical uncertainty and higher interest rates. Today, some companies are ramping up capex to take advantage of the opportunities presented by AI. Yet, many are still making modest plans, which is indicative of the current status of AI investment across different sectors.
Despite the excitement around AI, spending on information technologies has not been soaring as one might expect. In the third quarter of 2023, American firms’ investment in “information-processing equipment and software” fell by 0.4% year on year. Similar trends can be seen worldwide, with investment spending growing more slowly than before the pandemic in the OECD countries.
However, there are two possible interpretations of these trends. Some believe that AI is a “busted flush,” suggesting that big tech firms might struggle to find customers for their AI products and services. Others have a more optimistic outlook, suggesting that the adoption of new general-purpose technology tends to take time, and AI is still likely to change the economy in the future.
The potential impact of AI on the economy is still up for debate among many economists, but one thing is certain: change might be on the horizon. If you’re interested in expert analysis of big stories in economics, finance, and markets, we encourage you to sign up for our weekly subscriber-only newsletter, “Money Talks.”
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