IMF: AI could turn next recession into full-blown crisis

A high-ranking member of the International Monetary Fund (IMF) has warned that advancements in AI could unleash a truly hellish scenario during the next recession.

In a speech at an AI summit in Switzerland, the IMF’s First Deputy Managing Director, Gita Gopinath, called AI a “crisis amplifier” for the labor market and financial system.

She said that businesses are scrambling to adopt AI to reduce costs, which could result in massive layoffs when the going gets tough.

“[W]e have a much broader scale of potential job losses that we could have. And again, the risks of long-term unemployment are quite severe,” Gopinath said, adding that 30% of jobs in advanced economies are at risk of being replaced by AI.

She added that 20% of jobs in emerging economies and 18% in low-income countries are at risk of AI substitution.

In addition to permanently destroying jobs, AI could have a profoundly negative effect on financial markets during a recession—thanks to the rise of robo-advisers.

According to her, the problem is that robo-advisers have been programmed to deal with predictable market conditions, not adverse or unexpected ones.

Gopinath said in the event of a recession, AI models are likely to perform poorly, costing investors untold sums of money.

“[O]ne thing we know is that no two recessions tend to be the same,” Gopinath said. “You could have fire sales and hurting behavior, which lead to even larger collapses in asset prices.”

Global recession risks

From a eurozone recession to a disappointing post-Covid recovery in China, experts worry that the global economy is already flashing early warning signs.

Economists at Bain & Company have warned that the global economy has “all the ingredients for continued economic uncertainty and elevated geopolitical risks.”

As potential risks, they cited elevated inflation, high interest rates, aging populations, and war in Ukraine.

Experts also point to unsustainable debt accumulation as another potential risk. According to World Economic Forum President Borge Brende, global debt has reached levels not seen since the Napoleonic Wars between 1799 and 1815.

Nowhere is this more apparent than in the United States. The world’s largest economy has racked up more than $34 trillion in debt and is borrowing at a pace of $1 trillion roughly every 100 days.

In the meantime, advancements in AI are adding billions to the global GDP. According to PwC, AI could contribute up to $15.7 trillion to the global economy by 2030.

But while AI is positive for the economy as a whole, it remains to be seen how its economic benefits will be distributed in the event of a severe economic downturn.

In fact, some economists fear it could be a catalyst for massive layoffs.