LONDON: Bank of England Governor Andrew Bailey said that Artificial Intelligence has the potential to be the next great technological leap that transforms the economy, but warned that Britain must work with it to reverse a prolonged slowdown in productivity growth.
In a speech drawing on lessons from economic history, Bailey said the nature of economic shocks had shifted towards large supply-side disruptions, from the pandemic to geopolitical conflicts, while longer-term trends like an ageing population were also dragging on growth.
He highlighted that the UK’s potential growth rate had fallen to around 1.5% per annum from 2.5% in previous decades, a decline that makes public debt harder to manage and constrains living standards.
“If the denominator grows more slowly, economic policymaking gets more difficult,” Bailey said, referring to the size of the economy in the debt-to-GDP ratio.
The Governor outlined three historical models of growth, linking them to modern challenges. An ageing population, he said, acts as a “Malthus in reverse,” shrinking the labour force. Meanwhile, trade restrictions, including those resulting from Brexit, contradict the Smithian model of growth through open markets.
“If you ask me what the impact (of Brexit) is on economic growth, I do have to answer that question as a public official. And the answer is that for the foreseeable future it is negative,” Bailey said, though he added that trade would adjust and rebuild over the longer term.
With these headwinds, Bailey argued that the economy must rely on the Schumpeterian model of growth driven by technological innovation.
“We are putting our chips down on the Schumpeterian growth model,” he stated. “And, since AI looks like it may well be the next General Purpose Technology, we must work with it and ensure that it develops appropriately and well.”
He compared the current state of AI to the early days of electricity, which took decades to show up in productivity statistics, and stressed that “investment and persistence is crucial.”
However, the BoE Governor also struck a note of caution, warning that the development of AI could challenge financial stability “through stretched valuations,” particularly in an environment of larger global supply shocks.