This report provides enterprise-wide insights from across the Bank with a focus on how technological innovation fueled by artificial intelligence may reshape economies, markets, and public policy around the globe.
Key Conclusions
- Technological innovation is a structural tailwind for productivity and profits that could have wide ranging effects on the labour market, including displacement and/or wage suppression. However, like past innovation cycles, new and higher-value jobs may be created over time.
- Policy should focus on supporting worker transitions (e.g., reskilling, modernized employment insurance) to keep pace with technological change and avoid long-term unemployment that erodes the public revenue base. Automatic stabilizers should also be strengthened so support scales quickly to mitigate sector or regional shocks. As income shifts from labour to capital, governments should also broaden the tax base and modernize tax administration to sustain public revenues, while avoiding excessive payrolls taxes and preserving work incentives.
- Inflation may be biased higher in the short-term but should trend lower long-term. The build-out phase of this innovation cycle has large Capex and energy requirements. This can create supply bottlenecks and fan inflation in the near term. As productivity gains materialize, inflationary pressures may diminish amid excess supply, though the degree of disinflation will depend on the extent to which AI’s income gains raise aggregate demand.
- Advanced economies will benefit most, at least initially. Advanced economies are best positioned to capture early benefits given their higher exposure, preparedness, and access to capital and computing resources. Emerging markets and low-income countries may lag in early gains but could become more attractive over time.
- Equity market parallels to the dotcom era are warranted, but there are key differences. Today’s companies are fundamentally stronger than those of the dotcom era. As the innovation cycle matures, productivity and earnings growth are likely to broaden across industries.
- Diversification is essential. While equities are the likeliest long-term beneficiaries of technological progress, investors should remain diversified amid risks related to elevated valuations, policy uncertainty, and concentration.
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