AI and the global economy: Productivity, jobs, and inflation

**Blerina Uruci** (0:06)
So, the list of shocks is very long, and some of them will be positive, and some will be negative. So, this may sound messy and also confusing, but I think it's the nature of living through a period of major technological disruption.

**Jennifer Martin** (0:22)
Welcome to The Angle from T. Rowe Price, a podcast for curious investors. I'm your host, Jennifer Martin, a global equity portfolio specialist at T. Rowe Price Associates here in Baltimore, Maryland.
This season, we're exploring the rapidly evolving artificial intelligence landscape and what the future might hold for investors and innovators alike. In today's episode, we're diving into how the AI revolution is impacting the fixed income markets, which have become a key funding source for AI CapEx, and the long-term implications for productivity, inflation, and interest rates.
Today, I'm joined by two T. Rowe Price fixed-income experts, Arif Husain, head of global fixed income, and Blerina Uruci, chief US economist. Thank you both for joining us today. Blerina, you and I recorded a podcast together on AI back in 2024, which feels like forever ago. What has changed in the macro implications of AI in the last two years?

**Blerina Uruci** (1:20)
Thank you, Jenny. It's great to be here today. And yes, I went back and listened to our podcast from two years ago. Did we sound good?
It was fun. We had fun. It sounded like we had a good session.
So, back then, the discussion was very theoretical or hypothetical, if you like it. We're talking a lot about hallucinations, when are we going to get better models, adoption speed, a little bit, people hesitating to adopt, and so on. And I think right now, the discussion has really shifted toward show me the numbers in all the discussions that I'm having with our investment staff, as well as our clients. I'm having to talk about how AI is affecting growth, labor market, and inflation, and what's the outlook. So, let me provide some statistics around this. For example, in the last six quarters, if you look at AI-related capex and US GDP, about half of US GDP growth has been driven by AI capex. Now, this is very significant because the three years prior, this contribution was a third of what it is today. So, really, we've seen a pretty big impact on growth numbers themselves. And although this AI models may live in the cloud, to me, it feels like the investment cycle is really very physical. It's showing in the GDP data.
Labor is very interesting and it's much more nuanced. Whenever we survey US workers about the effect of AI, they report being worried that it will replace them. But I think this is also impacting wage pressures in a way because it makes workers more reluctant to ask for bigger wage increases. Then when we look at layoff numbers per se, we're not seeing there what workers are worried about, but we are seeing slower net job creation. And for me, this is important, and it brings me to the last point in terms of macro data.
To produce output for the economy, we need labor inputs, we need capital, and then we need this magical, unobserved ingredient that is called productivity. Now, productivity, as we measured it, output per worker has accelerated significantly from one and a half percent annual growth before the pandemic to two and a half percent in recent quarters. So after this productivity trend stagnating for two decades, we're finally talking about a productivity revival. But AI per se is a global story, and it's a very important story for financial markets globally. Let me tell you why. So as you know, we have a fantastic fixed income and fantastic equity fundamentals research here at T. Rowe Price. Our analysts have gone and crunched the numbers, looked bottoms up how much AI capex spend we're going to see in 2027 That's over $1 trillion.
I love putting this statistics into perspective. That's 3% of US GDP. But now in real time, we're seeing fantastic speed in capex expansion and how that affects the economy. And the next point is that when you ask our analysts, they will tell you two-thirds of that spend is going to be on imported chips and overall tech goods that other countries are producing. So essentially, what we're going to see is a 2% of GDP stimulus from the US private sector to the global economy. But I think it's a broader global story about the US capex cycle making the global economy more resilient. And this is going to have implications both for fixed income and issuance, as well as equity markets globally. So to go back to your original question, what's interesting to me is that the vocabulary around the AI discussion has changed a lot, but the framework has not. We're still talking about capex cycles. We're still talking about productivity and labor and inflation.