Driving Post-Pandemic Growth: Navigating Pricing Pressures and the Rise of Generative AI
As we navigate the complex landscape of the post-pandemic economy, two key factors are shaping the future of growth and productivity: the ongoing challenges of pricing pressures and the rapid rise of generative AI. In this article, we will delve into how these elements are interplaying and what they mean for the global economy.
The Economic Outlook: Growth and Inflation
The mid-2024 economic outlook, as highlighted by EY, predicts steady but desynchronized growth across different regions. Advanced economies are expected to see a slight acceleration in GDP growth, from 1.5% in 2023 to 1.6% in 2024 and 1.8% in 2025. However, emerging markets are anticipated to experience a slight deceleration, from 4.2% in 2023 to 4.1% in both 2024 and 2025.
A crucial driver of this growth in advanced economies will be the gradual loosening of monetary policy and the rebounding of inflation-adjusted income growth, particularly in Europe and the UK. Meanwhile, emerging markets will face a structural slowdown in mainland China, offset by robust growth in India and slight accelerations in Latin America and the Middle East and North Africa regions.
Cooling Inflation and Monetary Policy
Global inflation is expected to cool down significantly, from an average of 6.2% in 2023 to 4.6% in 2024 and 3.5% in 2025. This decline will be more pronounced in advanced economies, where inflation is anticipated to approach central bank targets by 2025. The easing of supply constraints, reduced labor shortages, lower energy prices, and moderating demand growth will all contribute to keeping inflation in check.
Central banks are likely to ease monetary policy gradually as disinflation continues. However, with risks to the inflation outlook tilted to the upside, policymakers will likely adopt a cautious approach, easing policy in a measured way.
The Rise of Generative AI
Generative AI has emerged as a transformative technology, rapidly adopted in both personal and professional settings. Since the debut of large language models like ChatGPT in November 2022, generative AI tools have been accessed by hundreds of millions of users each month. This adoption rate exceeds that of the PC and internet at comparable points in their development.
Productivity Gains and Economic Impact
Studies have shown that generative AI can result in significant productivity gains for workers. For instance, the Real-Time Population Survey (RPS) estimates that between 0.5% and 3.5% of all work hours in the U.S. are currently assisted by generative AI. This could translate to a labor productivity growth of between 0.1% and 0.9% at current levels of usage.
The IMF highlights that AI is crucial for addressing the supply-side constraints that have contributed to slowing growth and new inflationary pressures. AI has the potential to reverse the downward productivity trend and produce a sustained surge in productivity over time. However, this will require significant investments and the development of new skills, particularly in sectors and businesses that may lag in AI adoption.
Challenges and Paradoxes of AI Adoption
While generative AI promises substantial productivity gains, it also poses significant challenges. A key paradox is that excessive productivity growth driven by AI could lead to recessionary pressures. This could happen if the substitution of labor with AI-capital exceeds a certain threshold, triggering a self-reinforcing cycle of reduced demand, social disparities, and economic instability.
To mitigate these risks, proactive policy responses are necessary, including robust regulatory frameworks and a new social contract that integrates human contribution with AI to ensure a sustainable and inclusive economic future.
Real-World Applications and Investments
The adoption of generative AI is already making waves in various industries. For example, Walmart has used AI to rewrite over 850 million product listings, a task that would have required 100 times more staff without AI. Similarly, companies like Klarna are planning to significantly reduce their workforce by leveraging AI in tasks such as customer service and marketing.
Despite high interest rates, investments in AI are soaring, particularly in the tech sector. This trend is weakening the impact of monetary policy on business investment, as companies are fiercely driven to invest in AI technologies.
America’s Economic Exceptionalism
The American economy has outperformed other major economies post-pandemic, exceeding pre-pandemic growth projections despite significant challenges. Supply-side factors, including labor supply and productivity gains, have been key components of this exceptional performance. While the current productivity growth is largely attributed to post-pandemic job switching and better skill alignment, the future holds significant potential for AI-driven productivity boosts.
Conclusion and Future Outlook
As we navigate the post-pandemic economy, it is clear that generative AI will play a pivotal role in shaping the future of growth and productivity. While there are challenges to be addressed, the potential benefits of AI in relaxing supply-side constraints, driving productivity, and supporting sustainability goals are substantial.
To fully realize these benefits, it is crucial to implement proactive policy measures, invest in new skills, and ensure that the adoption of AI is inclusive and sustainable. As the world continues to evolve, staying informed about the latest developments in AI and automation will be essential.
