In its recent report, HSBC delved into the multifaceted impact of artificial intelligence (AI) on the economy, highlighting the promising advancements, as well as potential pitfalls and challenges that lie ahead.

The report paints a balanced picture, dissecting the "good," the "bad," and the "ugly" aspects of AI, aiming to help investors navigate the rise of this transformative technology.

The good

In the “good” part of the note, HSBC pointed to the immense potential of AI to drive productivity improvements across various sectors, among other things. Generative AI, in particular, has been identified as a key driver of this productivity boom.

The report notes that AI could enhance aggregate productivity, with estimates suggesting an annual boost in the range of 0.1-1.0%.

“If realised, this would be a significant tailwind for equity markets. However, past examples of similar technological development suggest this boost may be more elusive than many currently expect,” HSBC’s researchers wrote.

One of the standout sectors is design and manufacturing, where AI is already being employed to optimize processes, reduce waste, and create innovative products. For instance, the Mercedes F1 team leveraged AI to design a rear suspension part in just 48 hours, a task that typically takes six weeks.

The banking and financial services sector also stands to benefit substantially, with AI facilitating faster data analysis, improved decision-making, and enhanced customer service.

HSBC also underlines the broad benefits across other sectors, including pharmaceuticals, where AI aids in drug discovery and clinical trials, and hospitality, where this burgeoning technology improves customer experiences through virtual assistants and predictive inventory management.

The bad

Despite these promising prospects, HSBC researchers caution about the potential downsides of AI.

Among the significant concerns is the impact on employment. The report hints that AI-powered automation could displace a substantial number of jobs, particularly those involving repetitive tasks. Even if AI doesn't lead to a significant loss of jobs, it is likely to alter the balance between capital and labor, shifting profits towards capital.

“A wide-reaching piece of research from the IMF suggested that almost 40% of global employment is exposed to AI, with developed markets more exposed (60% of jobs) to the shock given the structure of the labour market,” HSBC noted.

“This is an important early distinction – while automation (such as with robotics) has typically affected the demand for in-person work, AI will play a much bigger role in the future of work in services, with those ‘higher-skill’ roles potentially more at risk. As a result, the impact of AI is, for now, more likely to be evident in developed economies,” it added.

The competitive landscape could also be affected, as companies might overinvest in AI technologies, driving costs up and reducing potential profitability.

HSBC points out that while the initial productivity gains are appealing, historical parallels with other technological breakthroughs imply that these benefits might not be as transformative as expected. Past instances, like the dot-com bubble, showed that over-exuberance could lead to unsustainable investment surges followed by sharp corrections.

“Of course, it’s probably still too early to know if the current period of AI excitement will end up the same way, given that we’re still at the very early stages of the hype and investments that could well come as a result of it,” HSBC writes.

“But it’s also worth keeping in mind that, if we were to move to a period where expected returns from an AI-induced boom were to be exceptionally high, policymakers would need to respond with a period of higher real rates in order to limit the degree of financial excess in the system,” the team continued.

The ugly

In its report, HSBC also didn’t shy away from addressing the more troubling aspects of AI.

One of the primary concerns is the erosion of trust and truth. Generative AI has made it increasingly difficult to distinguish between real and fabricated content, posing significant challenges for cybersecurity, fraud prevention, and political stability.

“Over several generations, humans have developed many heuristics which have, thus far, served us well,” the report states.

“Most notably, we say that ‘seeing is believing’. Well, not anymore thanks to Generative AI. This has significant implications for cyber security, fraud, and political harmony.”

Moreover, the environmental impact of AI is another critical issue. The increased use of power-hungry AI tools is expected to drive up electricity demand, necessitating more innovations in energy technology to mitigate this growth.

As well, the uneven distribution of AI's benefits could exacerbate inequalities, particularly affecting emerging markets (EMs) that might face greater disruption as jobs are reshored to developed markets.

In summary, while AI holds tremendous potential to revolutionize productivity and drive economic growth, HSBC’s report urges caution. The benefits are unlikely to be evenly distributed, and the risks—ranging from job displacement and competitive pressures to trust issues and environmental concerns—are substantial.

“Broadly speaking, we see grounds to be optimistic about the wider economic impact of AI, though not all companies, markets and people will benefit equally,” HSBC said.

“But while we are not necessarily convinced by some of the arguments about the perceived threat of AI, we think it is useful for investors to understand them, given that they have the potential to shape opinions towards a technology already driving huge shifts in asset prices.”