AI Revolution Driving Broad Structural Change
The AI revolution is triggering significant transformation across multiple sectors of the economy.
In recent months, a number of technology companies have reported strong earnings results. However, their share prices have generally failed to respond positively. In fact, the stocks of many companies that are active users of AI have declined sharply. This includes software firms, real estate brokers, and legal service providers.
The reasons are clear. With tools such as ChatGPT, individuals facing legal issues or software development challenges can now obtain answers that were previously available only from costly specialists. In other words, demand for these specialists is suddenly decreasing. While AI-generated responses still require review by a qualified professional, the associated costs are only a fraction of what they used to be.
Markets are therefore increasingly assuming that companies employing large numbers of specialists will either downsize significantly or, in some cases, disappear altogether. Because this affects a broad range of businesses, it could pose risks to the wider economy. Whereas AI was initially viewed primarily as a positive development due to its cost-reduction potential, many companies now appear vulnerable. Having taken on substantial debt in the past, concerns are emerging about their ability to meet future repayment and interest obligations.
This raises an important question: the technology sector has invested enormous sums in AI development—and continues to do so. What level of return can ultimately be expected on these investments?
A related question concerns the broader macroeconomic impact of AI. The current investment boom is undoubtedly supportive of economic growth. It is also positive that AI enables the rapid production of goods and services at lower cost. That said, energy supply is likely to remain a bottleneck for the time being, although significant investment in this area is expected.
In its current phase of development, AI is supporting economic growth, but it is also likely to generate increasing negative side effects over time—particularly in the form of reduced labor demand across many industries. AI could contribute to rising unemployment and, consequently, heightened social tensions. Several economists have been warning about this risk for some time.
It is true that further AI development will require additional skilled workers. However, this increase is unlikely to offset the broader displacement effects, which are expected to be substantially larger.
Moreover, international competition must not be underestimated. Large-scale AI investments are taking place worldwide, particularly in China. This keeps AI products competitively priced and accelerates their widespread adoption.
Ultimately, the extent of rising unemployment will depend on two key factors. First, if unemployment increases and downward pressure on wages and costs emerges, central banks may be able to pursue more accommodative monetary policy without triggering excessive inflation. This could stimulate demand in sectors less affected by labor displacement, allowing companies in those industries to limit workforce reductions or even expand hiring. However, this is unlikely to fully offset total job losses. The creation of new businesses and the introduction of innovative products will likely be necessary to absorb displaced labor.
Second, the ability of economies to generate such new growth will depend heavily on the strength of the entrepreneurial climate. We have greater confidence in the United States in this regard than in Europe. Encouragingly, Europe appears increasingly aware of this challenge, although decisive and large-scale reforms have yet to materialize.
Against this backdrop, international capital flows will need to be monitored closely. For the time being, we view these dynamics as supportive of the U.S. dollar relative to the euro.
