AI Bubble and Government Debt Threaten Global Economic Slowdown

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Global Economic Growth Slows Amid AI, Debt, and Trade Tensions

The global economy is facing a slowdown in 2024, with the Organisation for Economic Co-operation and Development (OECD) forecasting a growth rate of 2.9%, down from 3.2% in the previous year. This decline has been accompanied by concerns over various factors that could further impact economic stability. Experts from different regions have highlighted several key issues that may shape the global economic landscape this year.

Artificial Intelligence as a Trigger for Economic Shifts

Artificial intelligence (AI) has emerged as a significant factor influencing economic trends. Jack Zhang, Professor at the University of Kansas and Director of the Trade War Lab, noted that AI investment and data center construction played a crucial role in sustaining U.S. GDP growth last year. However, he warned that an AI bubble could burst as early as 2026 if investor optimism wanes.

Mark Blais, Professor at Brown University, echoed similar concerns, comparing U.S. AI investments to past Soviet projects. He emphasized that while there is a belief that pouring resources into AI will lead to transformative outcomes, this scenario is unlikely. China’s advancements in AI technology, particularly through model distillation and open-source models, are challenging U.S. dominance in the sector.

Blais also raised concerns about the potential impact on the U.S. economy if AI stock prices plummet. He pointed out that the top 20% of the wealthy, who account for 60% of U.S. consumption, have significant assets tied up in AI stocks. A collapse in these markets could trigger a recession. Analysts suggest that if the U.S. stock market experiences a crash akin to the dot-com bubble, approximately 16 trillion dollars in household assets could be lost.

Frederik Erikson, Director of the European Centre for International Political Economy (ECIPE), criticized the growing economic imbalance caused by AI concentration. He argued that other industries are struggling, leading to a decline in labor demand. This trend could worsen unemployment rates in the U.S.

Government Debt as a Major Disruptor

Rapidly increasing government debt is another critical factor affecting the global economy. According to the Institute of International Finance, global debt reached 345.7 trillion dollars as of the end of the third quarter of last year. This represents a 36% increase since 2019, driven by loose monetary policies and expansionary fiscal measures.

Jack Zhang highlighted the dangers of accumulating debt amid uncertain long-term growth prospects. He noted that while financial markets currently tolerate high debt levels in advanced economies, fiscal flexibility is diminishing. High interest rates and low growth make it increasingly difficult for governments to manage their budgets.

Frederik Erikson criticized the economic policies of the Trump administration, arguing that they led to high fiscal deficits and inflation. He warned that the U.S. debt problem poses a significant risk to the global economy, with the potential to cause a sovereign debt crisis. He also pointed out that Eurozone countries like France and Italy face challenges due to their inability to print currency independently.

In contrast, Mark Blais argued that U.S. debt is not as severe as some believe. He noted that despite decades of current account deficits, the U.S. has remained stable due to the global demand for U.S. assets. The dollar remains the standard for trade settlement and a safe asset storage option.

U.S.-China Relations and Geopolitical Risks

The relationship between the U.S. and China, which together account for over 40% of global GDP, remains a major risk factor for the global economy. Frederik Erikson commented that both nations are caught in a cycle of protectionism, with neither showing a clear intent to change the status quo. Jack Zhang noted that U.S.-China relations are unpredictable, but both governments are likely to avoid immediate conflict due to domestic challenges.

Experts predict that managed trade and sector-specific benefits will become more prevalent this year. Mark Blais emphasized the need to closely monitor the National Security Strategy (NSS) announced by the Trump administration. He suggested that the U.S. is reorganizing its foreign policy to dominate the Western Hemisphere, which could shift the balance of power in East Asia.

Blais also highlighted the changing dynamics between the U.S. and its traditional allies. He warned that South Korea and Japan must recognize that U.S. commitments are no longer as strong as before. Given the economic impossibility of severing ties with China, these countries will need to engage in careful diplomacy to maintain stability in the region.