The truly disruptive impact of artificial intelligence on the economy and financial markets may only become apparent when a downturn occurs. This could escalate into a real crisis if the risks of AI are not addressed, the deputy head of the IMF recently warned.
During a Speech at an AI summit in Switzerland On May 30, IMF First Deputy Managing Director Gita Gopinath said the discussion about the risks of AI has largely focused on privacy, security and misinformation, but much less has been said about the risk that AI could exacerbate the next recession.
In a world where artificial intelligence is widely used, this technology could turn an otherwise ordinary downturn into a much deeper economic crisis by disrupting labor markets, financial markets and supply chains, she said.
AI risks on labor markets
In normal economic times, companies have historically tended to invest in automation but still hold on to their employees because they make the profits they need. But when companies cut costs in a recession, employees are laid off and replaced with automation, she explains.
Gopinath cited IMF research showing that 30 percent of jobs in developed countries are at high risk of being replaced by AI, compared to 20 percent in emerging markets and 18 percent in low-income countries.
“So there could be a much bigger loss of jobs,” she warned. “And again, the risk of long-term unemployment is quite high.”
AI risks in financial markets
The financial industry has long relied on automation and earlier forms of AI, such as algorithmic trading, and today the sector is rapidly adopting newer AI technologies.
Gopinath pointed out that some AI trading will be replaced by more complex models that can learn on their own. Forecasts suggest that robo-advisors will manage over $2 trillion worth of assets by 2028, down from less than $1.5 trillion in 2023.
While AI can improve market efficiency and integration, the risks of AI are more likely to manifest themselves in a recession, she added, because new AI models will perform worse in novel events that are different from those they were trained on.
“And one thing we know: no two recessions are the same,” Gopinath said.
In such a scenario, AI could trigger a rapid and simultaneous shift toward safe assets, leading to falling prices for risky assets, she explained.
The AI models would then spot the price drops, view them as confirmation of their earlier moves, and then follow up with further asset sales. And given the black box nature of AI, such behavior could be difficult to control.
“There could be distress selling and damaging behavior, which could lead to even larger declines in asset prices,” Gopinath said.
AI risks in supply chains
As companies adopt AI, they can give it a greater role in making inventory and production volume decisions.
In normal economic times, this could increase efficiency and productivity. But AI models trained with “outdated data” could produce major errors and lead to a cascade of supply chain failures, she said.
Ways to mitigate the risks of AI
After outlining the dire scenarios, Gopinath also made recommendations to mitigate the risks of AI without compromising its positive aspects.
One option is to ensure that tax policy does not inefficiently favor automation over workers, although it explicitly states that it is not proposing a specific tax on AI.
Another option is to help workers train and acquire new skills while strengthening the social safety net through more generous unemployment benefits.
Artificial intelligence could also be part of the solution, for example in further training, more targeted support and the detection of early warnings in financial markets, she added.
“I think there is a real need for parallel efforts to ensure that we also make the global economy AI-proof,” Gopinath said.
Her warning comes a year after she said we may not have much time to find out how to protect people from AI.
“We need governments, we need institutions and we need policymakers to act quickly on all fronts, both in terms of regulation and in terms of preparing for what are likely to be significant disruptions in labour markets,” she said. The Financial Times.