Key Takeaways
- AI is moving into a new phase focused on implementation rather than infrastructure spending.
- Productivity gains are expected to come from automating tasks and enhancing human labour, not replacing it entirely.
- Canada’s service-heavy economy may be particularly well suited to benefit from AI adoption.
- AI-driven productivity gains could help offset demographic pressures from an aging workforce.
- While risks remain, broader AI adoption could provide a long-term economic tailwind for Canada.
Introduction to AI and Its Potential
The use of artificial intelligence (AI) is entering a new phase, where the focus is shifting from building the infrastructure behind AI to implementing the technology in various industries to improve efficiency, revenues, and margins. According to Kevin Khang, head of global economic research at Vanguard, this transition could play a crucial role in addressing Canada’s long-standing productivity challenges, particularly in service-based industries. Khang believes that AI has the potential to boost productivity, transform how the economy works, and change how companies generate profits.
The Shift in Investor Focus
For over a year, tech companies building the infrastructure behind AI have been the focus of many investors. However, attention is now starting to shift towards companies that can implement AI in their operations. Khang notes that this shift could bode well for some of Canada’s publicly traded companies and may help improve the country’s lagging productivity. Vanguard, as one of the world’s largest ETF providers, has a significant presence in the Canadian market, with its FTSE Canada All Cap Index ETF having almost $13 billion in assets and a management expense ratio of about one-fifth of one per cent.
The Phases of AI Adoption
Khang explains that AI is unfolding in phases, with the current phase being reminiscent of earlier technological cycles, such as electricity or mass manufacturing after the Second World War. In this phase, there is a deepening of physical investment across the economy, which has generated excess demand for old-economy sectors like industrials, materials, and energy. Khang notes that this has shown up in markets like Canada’s, with both the US and Canada experiencing this phenomenon.
The Economist’s Perspective on AI
As a financial economist, Khang has done extensive research on active portfolio construction and household finance. When asked about his perspective on AI, he notes that the technology has the potential to be a once-in-a-generation development, with its impact being multifaceted and unfolding over multiple innings and phases. Khang believes that the way AI is diffusing has created a binary reaction, with some people focusing on labour market implications and others seeing a kind of nirvana where everyone becomes vastly more productive. However, his view is more measured, and he believes that AI has significant potential to boost productivity by automating routine work and helping human workers perform better.
The Potential for AI-Driven Productivity in Canada
Khang notes that Canada’s service-heavy economy may be particularly well suited to benefit from AI adoption. With the bulk of economic activity coming from highly labour-intensive services, AI-driven productivity gains could help offset demographic pressures from an aging workforce. Khang warns that there is a risk that AI fails to meet expectations, but he believes that there is a realistic prospect that AI can help improve Canada’s poor productivity performance. He notes that thousands of startups around the world, particularly in the US, are working to unlock the potential of AI, and that Canada could benefit from this trend.
Conclusion and Future Outlook
In conclusion, the adoption of AI is entering a new phase, with the focus shifting from building infrastructure to implementing the technology in various industries. Khang believes that this transition could play a crucial role in addressing Canada’s productivity challenges and that the country’s service-heavy economy may be well suited to benefit from AI adoption. While there are risks associated with AI, Khang notes that broader adoption could provide a long-term economic tailwind for Canada. As the country faces demographic pressures from an aging workforce, AI-driven productivity gains could help offset labour shortages and provide a meaningful boost to the economy.