According to the IMF, artificial intelligence could turn an unusual downturn into an economic crisis

During a Speech at an AI summit in Switzerland On May 30, IMF First Deputy Managing Director Gita Gopinath said the discussion in regards to the risks of AI has largely focused on privacy, security and misinformation, but much less has been said in regards to the risk that AI could exacerbate the subsequent recession.

In a world where artificial intelligence is widely used, this technology could turn an otherwise unusual downturn right into a much deeper economic crisis by disrupting labor markets, financial markets and provide chains, she said.

AI risks on labor markets

In normal economic times, firms have historically tended to take a position in automation but still hold on to their employees because they make the profits they need. But when firms cut costs in a recession, employees are laid off and replaced with automation, she explains.

Gopinath cited IMF research showing that 30 percent of jobs in developed countries are at high risk of being replaced by AI, in comparison with 20 percent in emerging markets and 18 percent in low-income countries.

“So there could be a much bigger loss of jobs,” she warned. “And again, the risk of long-term unemployment is quite high.”

AI risks in financial markets

The financial industry has long relied on automation and earlier types of AI, akin to algorithmic trading, and today the sector is rapidly adopting newer AI technologies.

Gopinath identified that some AI trading will probably be replaced by more complex models that may learn on their very own. Forecasts suggest that robo-advisors will manage over $2 trillion value of assets by 2028, down from lower than $1.5 trillion in 2023.

While AI can improve market efficiency and integration, the risks of AI usually tend to manifest themselves in a recession, she added, because latest AI models will perform worse in novel events which might be different from those they were trained on.

“And one thing we know: no two recessions are the same,” Gopinath said.

In such a scenario, AI could trigger a rapid and simultaneous shift toward secure assets, resulting in falling prices for dangerous assets, she explained.

The AI ​​models would then spot the value drops, see this as confirmation of their earlier moves, after which follow up with further asset sales. And given the black box nature of AI, such behavior might be difficult to manage.

“There could be distress selling and damaging behavior, which could lead to even larger declines in asset prices,” Gopinath said.

AI risks in supply chains

As firms adopt AI, they can provide it a greater role in making inventory and production volume decisions.

In normal economic times, this might increase efficiency and productivity. But AI models trained on “outdated data” could produce big errors and result in a cascade of supply chain failures, she said.

Ways to mitigate the risks of AI

After outlining the dire scenarios, Gopinath also made recommendations to mitigate the risks of AI without diminishing the positive points of AI.

One option is to make sure that tax policy doesn’t inefficiently favor automation over employees, even though it explicitly states that it just isn’t proposing a particular tax on AI.

Another option is to assist employees train and acquire latest skills while strengthening the social safety net through more generous unemployment advantages.

Artificial intelligence may be a part of the answer, for instance in further training, more targeted support and the detection of early warnings in financial markets, she added.

“I think there is a real need for parallel efforts to ensure that we also make the global economy AI-proof,” Gopinath said.

Her warning comes a yr after she said we may not have much time to determine how you can protect people from artificial intelligence.

“We need governments, we need institutions and we need policymakers to act quickly on all fronts, both in terms of regulation and in terms of preparing for what are likely to be significant disruptions in labour markets,” she said. The Financial Times.