We have a lot of questions about the current economic situation and the impact on corporate profits. Spoke with Mark Zandi, Chief Economist at Moody's, today. Will AI change the way businesses do business? What does it mean for workers and employers?
AI has the potential to revolutionize many business practices. It is developing rapidly. Companies are already actively investing in these new technologies. History can serve as a guide. These technologies take time to incorporate into business practices and have a significant impact. We tend to see technology emerge, and we are able to see it, feel it, taste it. We knew it was coming. Therefore, it should happen immediately. But this is not the case. Typically, this takes years or even decades. I think all businesses will benefit from AI, but also face challenges. I know a lot of employees who are worried that they will be replaced by AI, and employers may be thinking, "Great, I can work around the clock without paying workers." ”
Do you think this will happen soon?
I think AI will have a different impact on workers and employers, presenting challenges and opportunities. For workers, the challenge is that their jobs can be eliminated, replaced or significantly changed. This will require workers to acquire additional skills and experience to adapt to the era of artificial intelligence. The chances are that if you can harness the power of AI to be productive at work, you should be able to earn a higher salary. And AI has increased everyone's productivity. The challenge for businesses is that it can dramatically change the competitive landscape. As a result of the advent of artificial intelligence, a company's comparative advantage can be severely disrupted, and other businesses can use this new technology to enter the market and compete with it. The benefit, of course, is increased productivity. Businesses are struggling to find ways to increase workforce productivity. They know that in the future, it will be difficult to find workers due to demographic trends, baby boomer dropouts from the labor market, and weaker immigration policies. Therefore, it is a benefit. As a result, both workers and employers face challenges and benefits.
So what do you think are the biggest risks facing businesses today?
I think the biggest threat to businesses right now is high interest rates and a lack of credit, caused by the banking crisis and the Federal Reserve's aggressive rate hikes over the past year. Businesses are facing difficulties. I think this is especially difficult for small and medium-sized businesses that don't have a lot of sources of financing. Large corporations have access to capital markets to raise capital and possibly larger cash reserves. But for small and medium-sized businesses, this is a problem. I think that's the biggest threat to their business right now.
Good. Inflation is affecting each and every one of us. But what is the impact on businesses and their investments?
High inflation has a lot of impact on businesses. Obviously, it raises the cost of labor and materials. As a result, businesses are struggling to figure out how to manage these higher costs and maintain profits and bottom lines. But it has also enabled some businesses to raise prices more aggressively. We have seen inflation rise since the onset of the pandemic and higher profit margins across the economy than before the pandemic. This shows that at least across all industries, businesses have been able to pass and exceed these increases to improve the bottom line and make earnings stronger. I suspect this will not continue in the future, as inflation will gradually come down. I mean, the Fed is trying to bring inflation back by raising interest rates to reduce the heat of the economy. We will start to see competitive pressures intensify and margins fall back to levels more consistent with pre-pandemic levels. But currently, businesses enjoy higher profit margins and better profitability.
So, will we see a recession next year? Or do you think the recession stalled?
Currently, the risk of recession is high, while inflation is also high. The Fed has been aggressively raising interest rates to curb inflation. So, historically, recessions tend to follow in such cases, although not always. We have an opportunity not to fall into recession in the current period. I don't want to be overly optimistic, the next 12, 18 or 24 months are going to be tough. But I think we can avoid a recession because inflation is coming back. We have passed the worst of times caused by the war in Russia and the pandemic. The Fed's high interest rate policy began to slow the economy. Wage growth is slowing and price pressures are starting to ease. Perhaps more importantly, the economy was surprisingly resilient, a factor that was unique to this period. For example, the excess savings accumulated by consumers during the pandemic that they could not spend because they sheltered at home.
So high-income households and low- and middle-income households in particular have a lot of cash, and they've been using that cash to supplement their incomes and keep spending, even in the face of high inflation. Plus, businesses have done a great job of keeping their employees. They did not have mass layoffs. I think it's because businesses were already facing labor shortages before the pandemic and realizing that this isn't going away anytime soon, given the demographics, baby boomer exit from the workforce, and weak immigration. Therefore, I think companies are reluctant to lay off workers. If companies don't lay off workers, the economy won't fall into recession. Layoffs would panic consumers, who stopped spending, pushing the economy into recession. And now, it doesn't seem to be going to happen.
Good. Change the topic a little. Has global warming changed your economic model? How can economists and investors adapt to this changing environment?
We are incorporating climate risk into our models and projections, and it is beginning to influence our long-term economic forecasts. When I say long-term, I mean more than one or two years in the next 10, 20 years, and the biggest economic cost will be related to the so-called physical risks, which are the damage caused by hurricanes, floods and wildfires, which are occurring more and more frequently, causing increased economic losses for all of us, and we will all have to deal with. Another cost is the so-called transition cost, the cost of transitioning from a fossil-fuel-led economy to one powered by clean and green energy. That's a cost. You can see that the Inflation Reduction Act is an effort to facilitate this transformation by providing tax credits, but it's at the taxpayer's cost. So this is a very important topic that we are actively incorporating into the model.
Investors and businesses are also becoming aware of the risks and opportunities of global warming. They are increasingly incorporating environmental, social and governance (ESG) factors into their decision-making processes. They are looking for sustainable and environmentally friendly investment opportunities and are sensitive to high carbon emissions and environmental damage risks. This is a global trend, and many countries and companies are striving to meet emissions reduction targets and shift to sustainable development. As a result, global warming has changed the way investors and businesses behave, who are increasingly concerned about environmental sustainability. This trend is expected to continue to grow in the future.
Finally, I would like to ask you about your outlook for future economic development. What is your forecast for economic growth in the coming years?
I must emphasize that economic forecasting is very difficult, especially in these uncertain times. However, based on current economic data and trends, I believe economic growth will remain stable in the coming years, although the pace of growth is likely to slow. Economies around the world are gradually recovering, benefiting from vaccination progress and economic stimulus. However, we still face many challenges, including supply chain issues, labor shortages and inflationary pressures. These factors may have an impact on economic growth.
I think economic growth in the coming years will be mainly driven by innovation and digitalization. New technologies such as artificial intelligence, the Internet of Things, and blockchain will continue to drive the economy. At the same time, sustainable development and green economy will also become important growth areas. Many countries are committed to reducing carbon emissions and promoting sustainable development, which will lead to new business opportunities and jobs.
Overall, despite some challenges, I am optimistic about the future development of the economy. The economy's ability to adapt and innovate will help us overcome difficulties and achieve sustainable growth.