Artificial intelligence is poised to trigger an economic transformation, fundamentally altering established rules for investing and growth. Following years of post-GFC discussions focused on modest 2 per cent growth, a strong case now suggests AI could deliver a sustained acceleration in US productivity. Investors, however, must distinguish technological hype from actual shareholder value. Vimal Gor, head of fixed income and multi asset at Sydney-based Ellerston Capital, emphasises understanding who monetises the technology and the price paid for future earnings. AI primarily boosts productivity by tackling the high cost of human effort in analysis and complex problem-solving.
Unlike traditional recruitment, AI models can be rapidly replicated, decoupling a company’s capacity from human limitations and enabling new business models. The dramatic cost reduction in AI models, exemplified by a 280-fold decrease for GPT-3.5-level performance, makes previously unviable analyses feasible. This impact extends to physical tasks, with cognitive AI merging with robotics; BMW’s use of Figure 02 humanoid robots for X3 vehicle production demonstrates how direct capital investment can expand physical capacity, potentially untethering global productive effort from human demographics. Implementing this surge demands substantial upfront investment, characteristic of an economic “J-curve.”
This shift carries profound implications for financial markets. For fixed income, a structural productivity boom could significantly raise the neutral real interest rate, potentially increasing nominal yields and causing capital losses on long-duration bonds, even amid lower inflation. Furthermore, faster real economic growth will rapidly expand the tax base, greatly improving sovereign debt mathematics. Equity markets will fiercely differentiate winners from losers; scarcity will shift towards physical bottlenecks like power grids and specialised semiconductors. Investors must adapt to changing macroeconomic rules or risk being left behind in this evolving landscape.
