The Potential of Generative AI to Transform the Global Economy
Many economists believe that generative artificial intelligence (AI) is on the cusp of transforming the global economy. According to a paper published by Ege Erdil and Tamay Besiroglu of Epoch, AI capable of broadly substituting for human labor could lead to “explosive growth” and a significant increase in GDP. Experts like Erik Brynjolfsson of Stanford University expect AI to power a productivity boom in the coming years.
Weak Capex and Slow Investment Growth in the Age of AI
For this economic transformation to occur, companies must make substantial investments in new software, communication systems, factories, and equipment to enable the integration of AI into their production processes. However, there is currently little evidence of an AI splurge. Across the world, capital expenditure (capex) by businesses remains remarkably weak. Despite a temporary increase in capex as lockdowns lifted after the COVID-19 pandemic, it has since slowed down due to geopolitical uncertainty and higher interest rates.
Mixed Expectations: Some Companies Increasing Capex, Others Holding Back
While some companies are ramping up capex to capitalize on the potential of AI, others remain more cautious. Some forecasters predict that Microsoft’s spending, including research and development, will rise by around 20% this year, while Nvidia’s is expected to soar by over 30%. Additionally, Mark Zuckerberg, CEO of Meta, announced that AI would be their biggest investment area in 2024. However, excluding AI-driven firms, companies in the S&P 500 are planning relatively modest capex increases of around 2.5% in 2024, in line with inflation.
Limited Spending on Information Technologies Amid AI Excitement
Contrary to expectations, spending on information technologies, a key enabler of AI adoption, is not soaring. American firms’ investment in “information-processing equipment and software” actually fell by 0.4% year on year in the third quarter of 2023. This trend is observable at a global level as well. The national-accounts data for the OECD countries show that investment spending, including by governments, is growing at a slower pace than before the pandemic. Disappointingly, weak capex has also resulted in a lack of productivity improvements.
Global Capex Trends Suggest Challenges Ahead for Generative AI
The global capex trends paint a challenging picture for the potential of generative AI. According to a high-frequency measure of global capex from JPMorgan Chase, growth is minimal. Moreover, with weak capex, there is little sign of substantial productivity improvements. The outlook for the economy in Europe makes the situation even less encouraging, with investment intentions of services companies in the EU less ambitious than in previous years. British businesses also plan to raise capex by a modest 3%, compared to a 10% expectation in early 2022.
In conclusion, despite the optimism surrounding the transformative potential of generative AI, current trends indicate that businesses are not yet making significant investments to fully harness its power. There is a discrepancy between the excitement of big tech firms and the actual demand for AI products and services. Whether this signifies a failure of generative AI or a temporary delay in its adoption remains to be seen.
Analyst comment
Neutral news.
As an analyst, the market’s growth potential in the near future may be hampered due to weak capital expenditure and limited spending on information technologies. Companies are showing mixed expectations, with some increasing investments in AI while others remain cautious. The global capex trends suggest challenges ahead for the transformative potential of generative AI, indicating a discrepancy between the enthusiasm of big tech firms and actual demand. The market’s reaction may be a slower adoption of generative AI and limited productivity improvements.
