US:

Latest Updates from Goldman Sachs:

• No significant changes in views.

Key Trends and Focus Areas:

• Federal Reserve Policy: Expecting the Fed to begin quarterly rate cuts starting in September, totaling two cuts for the year.
• Inflation: Anticipate core PCE inflation to be at 2.7% year-over-year by December 2024, moving toward 2% in 2025.
• Economic Growth: Predicting a persistent slowdown from the 4.1% real GDP growth seen in the second half of 2023 due to weaker real income growth, declining consumer confidence, and uncertainty related to the upcoming election, potentially affecting business investments.
• Labor Market: Now fully balanced, indicating that any significant decline in labor demand could directly impact employment levels.

 Japan:

Latest Updates from Goldman Sachs:

• Now, we are forecasting the next Bank of Japan (BoJ) rate hike in July (previously October), as the criteria for another hike are relatively low, with the expected increase being just 15 basis points.

Key Trends and Focus Areas:

• Inflation: Despite recent signs of weakness in sequential core inflation, we expect core inflation to stay above the BoJ’s target, at 2.6% year-over-year for 2024.
• Rising Interest Burden: Anticipated to be manageable for households and businesses due to solid economic activity and consistent wage growth.
• Financial Conditions: Continuing to ease in Japan.

Europe:

Latest Updates from Goldman Sachs:

• Increased the 2024 UK GDP growth forecast to 0.9% (from 0.8%) following better-than-expected April GDP data.

Key Trends and Focus Areas:

• ECB Policy: The next rate cut is expected in September; however, a pause in easing could occur if inflation and wage data exceed expectations over the summer.
• BoE Policy: Forecasts indicate the Bank of England will start cutting rates in August, driven by progress in reducing UK inflation.
• French and UK Elections: Upcoming French snap elections (June 30) could lead to fiscal expansion, affecting the debt-to-GDP ratio. The UK general election (July 4) is expected to yield similar fiscal policies regardless of the winning party.

Emerging Markets (EM):

Latest Updates from Goldman Sachs:

• Adjusted People’s Bank of China (PBOC) easing expectations, now predicting a 25 basis point reserve requirement ratio (RRR) cut in Q3 and a 10 basis point policy rate cut in Q4 due to sufficient near-term liquidity.

Key Trends and Focus Areas:

• China’s Economy: Showing divergence between robust export and manufacturing sectors versus weak housing and credit markets and very low inflation.
• EM Rate Cuts: The fundamental outlook for additional rate cuts in emerging markets remains strong. However, recent reversals in EM foreign exchange carry trades following unexpected election outcomes in Mexico, India, and South Africa could pose challenges to policy normalization.

Gen AI: too much spend, too little benefit?

Generative AI is being hailed as a transformative force for companies and societies, prompting major investments of nearly $1 trillion by tech giants, companies, and utilities into AI infrastructure such as data centers, chips, and the power grid. However, the tangible benefits of this spending have been limited so far. Experts are divided on whether these investments will ultimately pay off.

Key Perspectives:

1. Skeptics:

   • Daron Acemoglu (MIT Professor): Believes AI will automate less than 5% of tasks in the next decade and predicts only minimal increases in U.S. productivity and GDP growth. He is doubtful that AI costs will decrease significantly or that it will create enough new tasks and products to justify the investment.
   • Jim Covello (GS Head of Global Equity Research): Argues that AI is not built to solve complex problems that would justify the high costs of development and deployment. He is also skeptical that AI can significantly boost company valuations or replicate human capabilities effectively.

2. Optimists:

   • Joseph Briggs (GS Senior Global Economist): Estimates AI could automate 25% of tasks and boost U.S. productivity and GDP growth significantly over the next decade. He believes that while many tasks aren’t cost-effective to automate now, the potential for cost savings and technological advances will drive AI adoption.
   • Kash Rangan and Eric Sheridan (GS Analysts): Remain optimistic about AI’s long-term potential, noting that current investment cycles are comparable to previous ones. They believe the large investments by companies with strong capital positions and extensive networks will eventually yield returns.

3. Challenges Ahead:

   • Supply Shortages: AI growth could be constrained by shortages of critical components, such as chips. Analysts from GS warn that chip supply will not keep up with demand in the coming years due to technological bottlenecks.
   • Power Supply Issues: The increasing power demands from AI technology and data centers could lead to a severe power shortage. Utilities in the U.S. are not prepared for this surge, and substantial investment in power infrastructure is needed, which could face regulatory and supply chain hurdles.

4. Market Implications:

   • The market’s future depends on AI delivering its potential. If it does, it could lead to significant growth for utilities and other sectors. However, only the most favorable AI scenario would result in strong long-term returns for the S&P 500. Otherwise, an AI bubble could persist for some time, benefiting AI infrastructure providers in the short term.

Overall, the debate centers around whether AI’s promise will materialize into real economic and financial returns or whether it is overhyped, with significant barriers like cost, component shortages, and power constraints potentially limiting its growth.

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Table of Contents of “Gen AI: too much spend, too little benefit?” Report: