Many economists believe that generative artificial intelligence (AI) is about to transform the global economy. A paper published last year by Ege Erdil and Tamay Besiroglu of Epoch, a research firm, argues that “explosive growth”, with gdp zooming upwards, is “plausible with ai capable of broadly substituting for human labour”. Erik Brynjolfsson of Stanford University has said that he expects ai “to power a productivity boom in the coming years”.
For such an economic transformation to take place, companies need to spend big on new software, communications, factories and equipment, enabling AI to slot into their production processes. An investment boom was necessary to allow previous technological breakthroughs, such as the tractor or the personal computer, to spread across the economy. From 1992 to 1999 American nonresidential investment jumped by 3% of gdp, for instance, driven in large part by extra spending on computer technologies. Yet so far there is little sign of an ai splurge. Across the world, capital expenditure by businesses (or “capex”) is remarkably weak.
image: The Economist
After sluggish growth in the years before the covid-19 pandemic, capex increased as lockdowns lifted (see chart). In early 2022 it was rising at an annualised rate of about 8% a year. A mood of techno-optimism had gripped some businesses, while others sought to firm up supply chains. Capex then slowed later the same year, owing to the effects of geopolitical uncertainty and higher interest rates. On the eve of the release of OpenAI’s GPT-4 in March 2023, global capex spending was growing at an annualised rate of about 3%.
Today some companies are once again ramping up capex, to seize what they see as the enormous opportunity in ai. This year forecasters reckon that Microsoft’s spending (including on research and development) will probably rise by close to 20%. Nvidia’s is set to soar by upwards of 30%. “AI will be our biggest investment area in 2024, both in engineering and compute resources,” reported Mark Zuckerberg, Meta’s boss, at the end of last year.
Elsewhere, though, plans are more modest. Exclude firms driving the AI revolution, such as Microsoft and Nvidia, and those in the S&P 500 are planning to lift capex by only around 2.5% in 2024—ie, by an amount in line with inflation. Across the economy as a whole, the situation is even bleaker. An American capex “tracker” produced by Goldman Sachs, a bank, offers a picture of businesses’ outlays, as well as hinting at future intentions. It is currently falling by 4%, year on year.
Surely, with all the excitement about generative AI’s potential, spending on information technologies is at least soaring? Not quite. In the third quarter of 2023 American firms’ investment in “information-processing equipment and software” fell by 0.4% year on year.
image: The Economist
Similar trends are observable at a global level. According to national-accounts data for the oecd club of mostly rich countries, which go up to the third quarter of 2023, investment spending—including by governments—is growing more slowly than in the pre-pandemic years. A high-frequency measure of global capex from JPMorgan Chase, another bank, points to minimal growth. With weak capex, it is no surprise that there is little sign of productivity improvements, according to a real-time measure derived from surveys of purchasing managers (see chart).
An official survey in Japan does point to sharply higher capex growth in the future, after years of sluggishness. Yet this probably reflects factors specific to that country, such as reforms to corporate governance. And in most places outside America the situation is rather less encouraging. A worsening outlook for the economy in Europe does not help. Investment intentions of services companies in the European Union are less than half as ambitious as they were in early 2022. British businesses plan to raise capex by a mere 3% over the next year, compared with 10% when asked in early 2022.
These trends suggest one of two things. The first is that generative AI is a busted flush. Big tech firms love the technology, but are going to struggle to find customers for the products and services that they have spent tens of billions of dollars creating. It would not be the first time in recent history that technologists have overestimated demand for new innovations. Think of cryptocurrencies and the metaverse.
The second interpretation is less gloomy, and more likely. The adoption of new general-purpose technologies tends to take time. Return to the example of the personal computer. Microsoft released a groundbreaking operating system in 1995, but American firms only ramped up spending on software in the late 1990s. Analysis by Goldman Sachs suggests that while only 5% of chief executives expect AI to have a “significant impact” on their business within one to two years, 65% think it will have an impact in the next three to five. AI is still likely to change the economy, but with a whimper not a bang. ■
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales in August fell to their lowest level since January 2022 as sales in the primary metal and petroleum and coal product subsectors fell.
The agency says manufacturing sales fell 1.3 per cent to $69.4 billion in August, after rising 1.1 per cent in July.
The drop came as sales in the primary metal subsector dropped 6.4 per cent to $5.3 billion in August, on lower prices and lower volumes.
Sales in the petroleum and coal product subsector fell 3.7 per cent to $7.8 billion in August on lower prices.
Meanwhile, sales of aerospace products and parts rose 7.3 per cent to $2.7 billion in August and wood product sales increased 3.8 per cent to $3.1 billion.
Overall manufacturing sales in constant dollars fell 0.8 per cent in August.
This report by The Canadian Press was first published Oct. 16, 2024.
