Capital Economics flags two big questions dominating the AI–macro debate

Investing.com -- Capital Economics says two issues have increasingly dominated client discussions this year as artificial intelligence reshapes investor concerns.

According to the firm’s group chief economist, Neil Shearing, “two questions have come to the fore.”

The first is whether rapid AI adoption is already weakening labour demand, especially for younger workers.

The second is said to be whether the surge in AI-related capital spending is “a rational response to opportunity, or a classic case of overinvestment that stores up financial trouble for later.”

On the labour side, Capital Economics argues the narrative that AI is displacing junior workers “looks too neat.”

The firm notes that youth unemployment has risen fastest in Canada and parts of Europe, “economies that haven’t been at the forefront of the AI revolution.”

It also highlights that several of these trends “were already in motion before the AI boom began.”

Even in sectors most exposed to AI automation, such as IT, the data show “little consistent evidence of mass displacement of workers.”

Weaker hiring instead reflects broader labour-market loosening, degree inflation and post-pandemic unwinding in the tech sector.

The second question, how to think about AI investment, is “more complicated,” Capital Economics says.

Much of the debate, it argues, is being muddied by confusion between nominal and real investment. While enormous spending plans by hyperscalers have raised fears of overreach, the firm notes that “booms like these almost always involve some degree of overreach” and that even failed projects can leave behind infrastructure that is ultimately valuable.

Capital Economics adds that rising leverage tied to AI is a risk “worth watching,” though overall debt levels remain manageable.

The firm concludes investors may be entering a phase where “parts of the AI investment surge are excessive and will eventually correct” while the broader economic effects “could still be profoundly positive.”

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