The economic impact of AI

The economic impact of AI


Derek Hamilton

  • Managing Director, Economist – Ivy Equity Boutique
  • Read bio

Equity markets have continued to rally, boosted by strong performance from technology stocks, especially for companies tied to artificial intelligence (AI). However, assessing the economic impact of AI can be difficult. While companies have begun to leverage AI, the benefits of AI have mostly yet to be realized. What impact could AI have on the economy?

We believe that AI could affect the economy in several ways. We would like to focus on a few areas:

  • Gross domestic product (GDP) growth could improve as capital spending (capex) increases owing to AI buildout. Companies will likely continue to invest in data centers, software, communication networks, and ultimately factories and equipment, including robotics. This investment is only beginning and should accelerate rapidly in coming years. Longer term, the potential growth rate of the economy could be boosted by higher productivity growth.
  • Productivity should increasingly be a focus as we expect the labor market to remain tight in coming years, and companies will likely need to look for ways to boost worker productivity. AI could help in this area, with the potential to boost productivity by automating repetitive tasks and eventual integration into more difficult roles. As shown in the chart below, productivity growth was very weak in the last decade. A boost in productivity growth could increase the potential growth of the economy and the earnings growth for companies, in our view.
  • Inflation could be affected in a market-friendly way. While we believe inflation will be higher going forward versus the period following the global financial crisis, AI could eventually help contain inflation in various ways. As we mentioned previously, productivity growth may improve as AI is better utilized. Faster productivity growth allows the economy to grow more rapidly without a significant boost to inflation. In addition, the ability for AI to analyze large amounts of data at lightning speed could bring more efficient uses of supply chains and better assessments of pricing dynamics, thereby reducing costs and improving the overall functioning of businesses.

We think that AI has significant potential to affect the economy in various ways, even though it is still in its early stages. Businesses that apply AI effectively could have higher profits, and workers may receive better pay because of increased productivity. We would expect AI to continue to have an impact on markets for many years.

Productivity growth by decade (annualized)

Productivity growth by decade (annualized)

Sources: Macrobond, US Bureau of Labor Statistics (BLS).

Chart is for illustrative purposes only.

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