Where is AI heading?
At present, there is massive investment in all aspects of AI. This has two effects:
- The investment boom is likely to continue until the end of 2027, thereby providing a significant boost to the US economy.
- All this investment will soon enable much wider use of AI. This means that the use of AI is likely to increase rapidly from mid-2027 onwards.
In the coming quarters, this means that economic growth will receive a sustained boost from AI, and that this is likely to continue until the end of 2027. From mid-2027 onwards, however, things may start to change. As AI becomes more widely used, productivity will rise at a faster rate. In other words, the supply side of the economy will also receive a boost. The big question is simply by how much and how quickly.
Some analysts fear that this will happen very quickly, leading to rising unemployment, at least initially.
This brings us to another point. At present, nobody knows where AI is heading. In principle, such uncertainty would deter most companies from investing heavily in AI. However, the situation is different now. If companies do not invest heavily in AI capacity now, they can be certain that they will be unable to play a significant role in the near future. In other words: any company involved in the development of AI has no choice but to invest heavily in it now.
Consequently, however, there is a high probability that a significant surplus in the field of AI will emerge before too long. So many companies have no choice but to invest heavily in AI now, even though the return on that investment is highly uncertain.
This is now beginning to have an impact on the AI investment boom. In other words, the sums being invested are so large that, even if substantial profits are made, a great deal of borrowing is still required to fund the investments. Until recently, this was seen as carrying little risk, so the interest payable on the loans was barely higher than that on government bonds. Recently, however, the spread has been widening as this confidence begins to crumble.
Incidentally, another factor at play here is that an increasing number of CEOs of major AI companies have begun to warn that the development of AI, and the associated development of robots, could well take a turn that is dangerous for humanity. It must therefore be borne in mind that governments will draw up all manner of regulations that AI companies will have to comply with. This is something that could have a negative impact on profits.
This also means that it is not certain that AI will lead to favourable economic development for the time being. It is generally assumed that AI can lead to much higher productivity. This puts downward pressure on wage increases and inflation, allowing the economy to be significantly stimulated through fiscal and monetary policy. This, in turn, paints a ' ' picture of high economic growth and profits, without causing significant inflationary problems. For the time being, the stock markets are largely pricing this in.
However, something of a 'perfect storm' could also unfold:
- Significant overcapacity will cause profits to fall well short of expectations.
- This is then further exacerbated by much greater regulation in the field of AI.
- As a result, share prices will fall sharply, dealing a further blow to economic growth (a positive wealth effect resulting from rising share prices has been providing a significant boost to the economy for some time. This will then disappear and even turn negative).
- The slowdown in growth, combined with rising productivity resulting from the use of AI, will cause unemployment to rise sharply.
- In such a situation, there is a risk of deflation setting in. However, there would also be very large government deficits. These could well make it impossible to implement strong fiscal stimulus. Hence, monetary stimulus would then be the main recourse. This will not, however, be straightforward: with very large government deficits and significant money creation by the central bank, the bond market could easily interpret this as the pursuit of an inflationary policy. Short-term interest rates will then fall as a result of monetary policy, but long-term yields will, in fact, rise sharply out of fear of much higher inflation in the future. This could push share prices down even further.
- The only way to tackle this is through drastic measures to address public finances. However, there is a strong likelihood that political divisions would then be at their peak.
Given the current optimism surrounding AI, the 'perfect storm' scenario outlined above seems somewhat far-fetched. However, this scenario cannot be entirely dismissed. In our view, it will come to pass to some extent, which primarily means that many investors are currently basing their expectations on overly optimistic assumptions. This will not only have consequences for the stock markets, but will also strongly influence the value of the dollar.
