Why AI investments could reach $200 billion by 2025

- Higher interest rates may be the new normal # # --------------------------------------------------------------- The key takeaways today: - How generative AI may affect investment, financial markets, and cybersecurity - Higher interest rates may be the new normal - Why Germany's economy is facing challenges — and how it's adapting Was this newsletter forwarded to you? ([Sign up now.]( --------------------------------------------------------------- AI investment forecast to approach $200 billion globally by 2025 Innovations in electricity and personal computers unleashed investment booms of as much as 2% of U.S. GDP as new technologies were adopted into the broader economy. Now, investment in artificial intelligence is ramping up quickly and could eventually have an even bigger impact on GDP, according to Goldman Sachs Research.   Generative AI has enormous economic potential and could boost global labor productivity by more than one percentage point a year in the decade following widespread usage, Goldman Sachs economists Joseph Briggs and Devesh Kodnani write in the team's report. But for that large-scale transformation to happen, businesses will need to make significant upfront investment in physical, digital, and human capital to acquire and implement new technologies and reshape business processes. [Those investments, which could amount to around $200 billion globally by 2025, will probably happen before adoption and efficiency gains start driving major gains in productivity]( Over the longer term, AI-related investment could peak as high as 2.5 to 4% of GDP in the U.S. and 1.5 to 2.5% of GDP in other major AI leaders, if Goldman Sachs Research's AI growth projections are fully realized. Our economists estimate AI investment could approach $100 billion in the U.S. and $200 billion globally by 2025. “Despite this extremely fast growth, the near-term GDP impact is likely to be fairly modest given that AI-related investment currently accounts for a very low share of U.S. and global GDP,” Briggs and Kodnani write. --------------------------------------------------------------- What the booms in electricity and internet show us about AI As investors try to understand how the boom in generative artificial intelligence may play out, [lessons from the adoption of electricity and the internet]( may also offer insight into how AI innovation will filter through financial markets, according to Goldman Sachs Research. While there are limits to these comparisons — the transition to a peace-time economy following World War I and the emerging market crises in the late 1990s, for example, complicate the analysis — [those periods are most similar to the AI episode underway now]( Goldman Sachs Research Senior Advisor Dominic Wilson and Analyst Vickie Chang write in the team's report. U.S. equities had healthy, if unspectacular gains, while company profits, earnings, and the S&P 500 outpaced nominal GDP by a modest amount.  These two experiences suggest that the biggest impact on asset markets was in equities and equity valuations, and U.S. equities have already been the focus of the potential gains from AI so far. But these historical episodes also indicate there is a risk of a bubble where the market initially overpays for the productivity boom, impacting a broad set of assets. The experience of the 1990s suggests this dynamic could be associated not just with a period of unsustainably high equity prices, but also larger demand booms, greater foreign exchange appreciation, and higher interest rates in the leading AI-adoption countries than would have otherwise been the case. --------------------------------------------------------------- What AI could mean for cybersecurity Generative AI stands to remake the cybersecurity landscape, according to Brook Dane, portfolio manager with Goldman Sachs Asset Management. “AI tools can make attacks cheaper, more sophisticated, and more targeted,” Dane points out.   Cybercrime has already risen dramatically in recent years, with damage of $10.3 billion reported for 2022. Dane says that this is “just the start.” But there's a positive side to AI's impact, Dane says. “AI tools can us help predict and identify security risks, and respond to them in real time. They could also mitigate the harm of attacks by detecting and stopping breaches.”  As stronger tools protect against more dangerous attacks, he believes [cybersecurity stands to become “an even more important part of the enterprise technology landscape.”](  “It's just one example,” Dane adds, “of how generative AI stands to reshape workplaces and industries from the ground up.” --------------------------------------------------------------- Germany: a country at the crossroads Germany slipped into a technical recession earlier this year as the country struggles with a weaker manufacturing sector, high inflation, and the fallout from the war in Ukraine. At the same time, [the country is contending with multiple immense transitions]( as it aims to decarbonize energy production across key sectors of its economy — including its prized automotive industry, which is rotating from combustion engines to electric. And if that weren't enough, its relationship with China, a key source of growth in a critical export market, is under pressure. Adapting to these multifaceted challenges will require “massive investment,” explains Wolfgang Fink, CEO of Goldman Sachs for Germany and Austria, on the latest episode of [Goldman Sachs Exchanges](. “The amount of investment required to transition this economy, in particular its industrial base, into a more sustainable, renewable energy world, is massive,” he tells host Allison Nathan. “It's a massive investment and not only on the micro side, i.e., the company side, but also on the macro side, i.e., the whole infrastructure that is required.” [Read the related article](. --------------------------------------------------------------- The Treasury market's latest ‘pain trade' One of the biggest moves in the markets last week was the surge in longer-term U.S. Treasury yields to their highest levels in more than a decade. Goldman Sachs' Anshul Sehgal, co-head of U.S. interest rate products trading, and Muhammad Qubbaj, head of North America interest rate product sales and co-head of the cross asset sales business, say higher rates could be the new normal.   The prices of longer-term Treasuries fell last week, sending yields higher. What were the primary drivers?    Anshul Sehgal: One of the catalysts was the Bank of Japan's move to amend its yield curve control policy, which lifted the hard cap on 10-year government bonds. The BoJ's move marks an important structural shift because Japanese investors — who have long played a key role in the global bond markets — now have an incentive to move their substantial holdings in U.S. Treasuries to their country's domestic bonds. We haven't seen signs of that move yet but some market participants expect that repatriation to happen soon.    Muhammad Qubbaj: A lot of market participants were positioned for a “bull steepening” of the curve, where short-term interest rates fall faster than long-term rates. Even as we entered the summer and the soft-landing scenario became the consensus view, most investors still expected a recession in 2024 and a steep cutting cycle. What happened last week was the exact opposite. Long-term interest rates increased at a faster rate than short-term rates — a move known as a “bear steepener” — and took many investors by surprise.   So how do you see this selloff playing out?   Anshul Sehgal: If long-end rates sell off more, we expect financial conditions to tighten. This could pull forward the date of the Federal Reserve's first rate cut, but it's too early to tell. We think there are structural reasons behind why we are in a higher-rates regime. First, for more than 10 years, central banks supported global rates by buying longer-term bonds — or adding duration. None of them are buying anymore. Second, inflation is becoming a real risk again for the first time since the global financial crisis, which means that markets factor in an inflation-risk premium into holding long-dated bonds. Our economists believe we're in the third year of a five-year repricing cycle. Finally, governments are still running large deficits which can ultimately lead to more inflation should the government need to print money to finance those deficits.    Muhammad Qubbaj: Basically, people need to wrap their heads around having to operate in a higher rates environment — this will be the new normal. In addition to the changes highlighted by Anshul, 2023 marks a pivotal year as this is the year the largest number of Americans are turning 65, a continuation of the retirement of the Baby Boomers. And as people move out of the workforce, they switch from net savers to net spenders. This will put upside pressure on both yields and inflation. Elsewhere, our colleagues in Goldman Sachs Research find that flows into longer-duration US government bond funds have outpaced flows into shorter-duration bond funds. # --------------------------------------------------------------- The Markets: Positioning for a late economic cycle Recent economic indicators — ranging from the Consumer Price Index, jobs numbers, and the surge in long-term Treasury yields — point to signs that the U.S. economy will likely avoid a recession, says Ashish Shah, chief investment officer of Public Investing within Goldman Sachs Asset Management. That's creating an economic backdrop that is cautiously supportive of risk assets, he says. “Our view is that we are late cycle when it comes to the economic cycle,” Shah says on latest episode of [The Markets](. “It doesn't mean that you want to sell everything down," he adds. "But you have to be cautious around what could transpire next given the fact that the Fed is very tight.” Start your Friday mornings with our podcast, [The Markets from Goldman Sachs Exchanges](. In just 10 minutes or less, we break down the key issues moving markets. Find us wherever you listen to podcasts. --------------------------------------------------------------- Briefings Brainteaser: When was the computer program invented? The development of the personal computer in the early 1980s preceded a boom in economic productivity. But before PCs took off, computer technology had been advancing for decades. When did the first computer program run on a computer?  A) 1931 B) 1948 C) 1956 D) 1964 [Check the answer here.]( --------------------------------------------------------------- Goldman Sachs in the news [CNBC]( August 4 [Wage growth falling but needs to decelerate further for Fed's inflation target: Goldman's Hatzius (3:51)]( [CNBC]( July 25 [Goldman Sachs predicts ‘peak electricity demand shortages' in India (2:54)]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. 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