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What happened to the artificial-intelligence investment boom?

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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.

 

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Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

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OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.

Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.

Business, building and support services saw the largest gain in employment.

Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.

Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.

Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.

Friday’s report also shed some light on the financial health of households.

According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.

That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.

People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.

That compares with just under a quarter of those living in an owned home by a household member.

Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.

That compares with about three in 10 more established immigrants and one in four of people born in Canada.

This report by The Canadian Press was first published Nov. 8, 2024.

The Canadian Press. All rights reserved.

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Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

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The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.

The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.

CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.

This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.

While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.

Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.

The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.

This report by The Canadian Press was first published Nov. 7, 2024.

Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.

The Canadian Press. All rights reserved.

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Trump’s victory sparks concerns over ripple effect on Canadian economy

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As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.

Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.

A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.

More than 77 per cent of Canadian exports go to the U.S.

Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.

“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.

“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”

American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.

It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.

“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.

“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”

A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.

Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.

“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.

Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.

With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”

“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.

“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”

This report by The Canadian Press was first published Nov. 6, 2024.

The Canadian Press. All rights reserved.

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