How Artificial Intelligence Is Powering — & Testing — Global Growth

By TOSI ORE

Global Growth Defies Tariffs as the AI Economy Takes Center Stage

Resilience in an Age of Disruption

AGAINST a backdrop of trade fragmentation, tariff escalation, and geopolitical uncertainty, the global economy has delivered an outcome few anticipated. Rather than buckling under renewed US-led trade disruptions, global growth has demonstrated notable resilience. Updated projections now place global economic expansion at 3.3 percent, an upward revision from earlier estimates, with the bulk of the improvement driven by the United States and China.

What makes this outcome striking is not merely the headline number, but its consistency. Growth projections remain broadly unchanged from a year ago, suggesting that the immediate economic shock from tariff measures has been largely absorbed. This endurance reflects a complex mix of easing trade frictions, fiscal support, accommodative financial conditions, and a private sector increasingly adept at navigating supply chain disruptions.

At the heart of this resilience lies a powerful and transformative force: a surge in technology investment, particularly in artificial intelligence.

Technology Investment Becomes the Growth Engine

While traditional manufacturing indicators remain subdued across major economies, investment in information technology has surged. In the United States, IT investment as a share of GDP has climbed to its highest level since 2001, underscoring a decisive shift in the composition of business spending.

The rapid adoption of AI-driven technologies—automation systems, advanced data analytics, and generative tools—has fueled expectations of productivity gains and profitability. These expectations have translated directly into market behavior. Since late 2022, coinciding with the mainstream rollout of generative AI, equity markets have rallied sharply, particularly in technology-heavy indices.

Although this investment boom is most pronounced in the United States, its effects are global. Asian economies, especially those embedded in semiconductor and electronics supply chains, have benefited from rising technology exports. In this sense, AI has become not just a domestic growth lever but a transnational economic catalyst.

Financial Conditions: Fuel and Fault Line

Favorable financial conditions have amplified the tech-driven expansion. Strong earnings growth and buoyant equity markets have provided firms with both confidence and capital to expand. However, the composition of financing is shifting. Debt issuance is increasingly replacing equity funding, pushing corporate leverage higher.

This trend introduces risk. Elevated leverage can magnify returns in good times but exacerbate losses when conditions turn. Moreover, the capital-intensive nature of AI infrastructure—particularly advanced processors with short depreciation cycles—means firms face continuous reinvestment pressures. Frequent hardware upgrades can compress margins, strain balance sheets, and heighten vulnerability to shifts in interest rates.

These dynamics underscore the need for careful monitoring. What appears today as financial strength could become tomorrow’s point of fragility.

Echoes of the Dot-Com Era

Historical parallels are inevitable. The current IT investment boom invites comparison with the dot-com surge of the late 1990s. While similarities exist—rising valuations, optimism about productivity, and a technology-led expansion—important differences remain.

Unlike the rapid, speculative surge of the dot-com era, the current rise in IT investment has been more gradual, accelerating meaningfully only in the past year. Earnings growth has been stronger, keeping price-earnings ratios more contained. Estimates suggest that overvaluation in US equity markets is roughly half the level seen during the dot-com bubble.

Yet vulnerability remains significant. Technology stocks, particularly AI-related firms, now account for a disproportionately large share of market indices. Many pivotal AI companies are privately held, relying heavily on debt rather than equity markets. At the same time, overall market capitalization has grown dramatically relative to output, amplifying the potential macroeconomic impact of even a modest correction.

Downside Risks and Global Spillovers

The outlook presents both promise and peril. On the upside, successful AI deployment could lift global growth by 0.3 percent, delivering tangible productivity gains. On the downside, inflated expectations could unravel. A moderate correction in AI valuations—similar to scenarios modeled in recent economic outlooks—could shave 0.4 percent off global growth.

Such a downturn would not remain confined to technology hubs. With foreign ownership of US equities at record levels, a sharp correction could transmit wealth losses across borders, dampening consumption worldwide. Even economies with limited exposure to technology sectors would feel the effects through reduced external demand and tighter financial conditions.

These risks are compounded by constrained fiscal space, rising geopolitical tensions, and increasing reliance on trade controls for strategic goods.

Policy Imperatives in an Uneven Boom

Policymakers face a delicate balancing act. Strong prudential regulation is essential to contain financial vulnerabilities, particularly in sectors exposed to AI-related leverage. Monetary authorities must remain agile—tightening policy if the boom overheats, but prepared to ease rapidly should demand falter.

Fiscal policy must focus on restoring buffers while investing in human capital. AI’s uneven labor impact demands proactive measures: skills retraining, mobility support, and policies that ensure innovation benefits are broadly shared.

A Test of Economic Stewardship

The global economy has weathered the tariff shock with unexpected strength, but resilience should not be mistaken for invulnerability. The concentration of growth in a narrow technology segment presents structural risks. Whether the AI boom delivers durable prosperity or another cycle of excess will depend on policy discipline, regulatory vigilance, and the ability to translate innovation into inclusive growth.