Financial markets have placed enormous bets that AI will drastically boost productivity. But Allianz's top economist sees a disconnect between that enthusiasm and the messy reality of adoption.
The Exuberance Gap
Subran is not denying that AI will change the economy. He calls it "a renaissance-like a moment." But he warns that markets are pricing in gains that may not arrive as fast or as evenly as expected. "We don't really know what is going to be the adoption and the impact on the real economy, but the market is already being very optimistic, especially on productivity gains, when it's going to be a bit of a hybrid situation," Subran said.
Get your free investing masterclass bonus when you join Market Briefs, our free daily newsletter
Debt Expansion and Uneven Investment
Subran warns of a self-reinforcing cycle of rising debt from capital spending that is surging in the United States. This cycle, which Subran calls a "loop of debt expansion," occurs when companies borrow heavily to build AI infrastructure, betting that future productivity gains will repay the loans. If those gains fail to materialize, companies may struggle to service their debt, creating financial strain. International regulators have taken notice, considering this pattern a possible danger for the world economy.
Bond Markets Stay Cautious
Subran sees a split between debt and equity markets. Bond traders are already pricing in risk. Subran observed, "Markets are seeing that - when you look at the corporate spreads in this sector, especially the hyperscalers, they tend to be a bit more cautious than before." He added, "I don't see complacency on the debt market."
One area that raises particular concern is data centers. "When you look at the risk of obsolescence of some of these data centers, when you look indeed into this monetizing of the CapEx type of move, if you issue debt to pay your shareholders, that doesn't look very good to me," Subran said. He further stated, "On the bond side, I think there's still a lot of vigilantes. On the equity side I still think it seems like the sky is the limit, and of course that is something that is not the case."
International authorities have been raising alarms. The Bank for International Settlements has categorized AI as a pressure point for global prosperity, while an IMF official highlighted the risks of the debt-expansion loop. These warnings underscore the potential for financial strain if AI spending does not yield expected returns.
The cautious outlook from Subran reflects broader concerns among international regulators.
Subscribe to Market Briefs, our free daily newsletter, and claim your bonus investing masterclass
