Investment in artificial intelligence (AI) is helping to partially offset the negative economic impact of geopolitical shocks and supply chain disruptions caused by the war in the Middle East. Strong demand for technology and related manufacturing significantly boosted private investment and consumption in many key economies last year, the Organization for Economic Cooperation and Development (OECD) said today. At the same time, its report strongly warns of the risk of unmet expectations, which could lead to a widespread and sudden collapse in financial markets.
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Is AI Overhyped?
If returns on AI investments fail to meet expectations, technology stock prices could plummet, with pessimism subsequently spreading to broader market indices. According to the OECD, such a scenario would pose a significant risk to the global economic outlook due to its impact on private demand.
According to the OECD, the positive impact of AI is already evident in labor productivity growth, particularly in the United States. There, sectors with high AI adoption rates, such as finance, insurance, and professional services, are growing faster than the rest of the economy. Business optimism regarding AI remains high, as evidenced by the growing capital expenditure plans of major technology firms in the U.S. and China for this year.
According to the OECD, financial stability is threatened by the dwindling cash reserves of AI companies, even though they account for an ever-growing share of stock and corporate bond issuances in the U.S. Moreover, many of these firms raise capital in less transparent private markets, which increases the risk of default on various credit products.
If AI profitability is reassessed downward, companies could drastically cut back on planned massive investments in data centers, software, and other related infrastructure. Such spending cuts would directly weaken global growth. The OECD therefore recommends implementing strong regulation and monitoring of financial markets to enable a timely response to risks associated with the overvaluation of technology assets.
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The Tech Bubble 2.0?
The OECD also noted this month that nine major companies involved in artificial intelligence and technology will need to finance capital expenditures totaling $4.1 trillion by 2030. The OECD warned at the time that the sharp rise in borrowing by AI companies seeking to expand data centers and boost processor performance could cause corporate bond markets to resemble stock markets more closely. Trading in the stock market is considered risky because stock markets are characterized by significant volatility.
According to a Gartner estimate, spending on AI and related infrastructure could reach $2.5 trillion this year, representing a 44 percent increase from last year. In recent months, warnings have emerged about a potential investment bubble consisting of overvalued stocks linked to this technology.
The Bank of England noted last year that stock valuations on U.S. stock markets resemble, in some metrics, the valuations recorded near the peak of the so-called dot-com bubble. That bubble burst in 2000. Between 1995 and the peak of the bubble in March 2000, the Nasdaq Composite Index, which includes many technology stocks, rose by approximately 600 percent. However, it subsequently fell by 78 percent by October 2002, erasing all gains from the previous period.
The war in the Middle East began on the last day of February with a U.S.-Israeli attack on Iran, which retaliated by attacking Israel and Arab states in the region where U.S. bases are located. As a result, civilian air traffic in the region was significantly restricted, with the exception of repatriation flights, and due to threats from Iran, shipping traffic in the Strait of Hormuz—a key transportation hub—has virtually come to a halt.
Source: Reuters
