Financial markets, however, are not the economy. Advanced and emerging economies are expected to record moderate growth alongside rising inflation, and the outlook would deteriorate significantly if the current peace agreement fails to evolve into a more durable resolution. Higher energy and food prices will place renewed pressure on household purchasing power, with lower-income households likely to be affected most severely, as they spend a larger share of their income on these essential goods.
AI investment has provided a countervailing force to the negative economic effects caused by the war on Iran, especially benefitting the US, China and related commodity exporters. As investments in physical infrastructure keep growing, investor optimism continues. The SpaceX IPO has only added further momentum to this narrative. Yet, the macroeconomic consequences of AI itself – as opposed to the current wave of investment – remain entirely to be seen. Clearly, huge revenue growth in the near future is needed to make good on current valuations. But where will this revenue come from?
Some AI-enthusiasts seem convinced that AI will raise US productivity across the board, in effect ‘paying for itself’. We remain more cautious. So far, there is little evidence that companies adopting AI reach above normal productivity growth. While CFOs expect substantial improvements in labor productivity, we do not see abnormal improvements in revenue-based productivity measures (yet?).
This is not to say that AI will not be used in companies; it already is being used. What remains unclear is how its usage affects other macroeconomic variables. Productivity effects on the macroeconomic level might be large, but they equally might be negligible. They also might be small at first, but show up later anyway, as businesses move from adopting AI within existing systems to redesigning their operations around them. At this point, all seem plausible hypotheses. Incoming data over the coming years should tell us more.
One would almost forget it amidst all the geopolitical and technological developments, but the global economy remains profoundly unsustainable. An surprising side-effect of the war on Iran might turn out to be the renewed focus on energy sovereignty. This second major energy crisis in just a few years has reminded many governments that reducing import-dependence in their energy system is crucial. Spain shows how investing in renewables and reforming electricity markets translates into resilience, with Spanish households being relatively sheltered from rising energy prices in recent months. Resilience and sustainability go hand-in-hand.
Yet, investing in renewable energy capacity alone will not be enough to enable prosperous lives for all within planetary boundaries. More fundamental reforms are needed, including a massive global redistribution and a move towards sufficiency. This would include the food, resource and social transitions alongside the energy transition.
Two recent reports by large groups of scholars and policymakers show just how such reforms could be implemented jointly. Reducing both income and wealth inequality (who could disagree now that the world has seen its first trillionaire) would be both a goal in itself and a means to reduce ecological overshoot. The level of ambition and coherence displayed in these reports, and the alignment with our own vision, are inspiring. They show that we, together, can craft an economic system that genuinely served human wellbeing within planetary boundaries.
