Economy Propped Up By Three 'A-Pillars,' Says EY's Daco

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00:00When we talk about different frameworks to try to describe the economy, we talk a lot about the

00:03K-shaped economy, the consumers on the top and the bottom. Now adding to the mix, the A-pillars

00:08foundation. Lay it out for us in your own words. Yeah, I think there's been a lot of talk around

00:13the K-shaped consumer spending outlook, but it's broader than that. The economy is K-shaped. We're

00:17seeing greater degree of polarization in terms of the different drivers of economic activity. And

00:22what I wanted to reflect with the three A-pillars was essentially that we have a narrow foundation

00:27to economic activity, which is currently going through a virtuous cycle because all of these

00:33pillars are interconnected. But there are downside risks if any one of these pillars starts breaking

00:39apart. The idea is that essentially we have optimism around AI. We're seeing a lot of capital

00:44investment that is supporting economic activity. About a third of GDP growth in the first half of

00:49this year was driven by AI investment, data centers, investment in semiconductors, software,

00:55R&D, all driving economic activity, which is very good. There's been also a lot of optimism in terms

01:01of the stock market that has been driving up valuations. But it's been a K-shaped outlook when

01:06it comes to the stock market. Not all firms are created equal in this environment. There's some

01:11investment that is just out of the fear of missing out here. And then that is in turn supporting a

01:17greater wealth effect, which is gradually supporting more spending by more affluent consumers.

01:23The less affluent consumers are less invested in the stock market. They're not benefiting as much

01:27from that. This is all very good. But if there starts to be doubts around the prospects for AI,

01:33if there starts to be a bit of a pullback in investment or pullback in some of the big names

01:38on the AI front, what effect does that have in terms of the wealth effect, the confidence effect,

01:43even for those that aren't invested in the stock market? It could actually lead to a pullback in

01:48consumer spending. That's a lot of questions, right, of ifs in terms of how it plays out. I think of

01:51foundations, Greg, and there are different types of foundations and some can withstand a lot,

01:55some cannot. How strong is the foundation in your view of this AI spend, which has led to

02:02higher asset prices on all things connected AI and that ultimately leads to those asset price gains

02:09and people spending, especially among the wealthy who are mostly in the market or some other kinds of

02:14investments? I think one of the things that we talk to a lot of clients about is this notion that

02:19we are increasingly in an environment that is driven by supply side dynamics. It's a very

02:24different economic environment, a very different economic paradigm than what we've been accustomed

02:28to for the past few decades. And when I say that, people start to perk up and ask, what do you mean

02:33by that? And what I mean by that is that over the past few years, we were accustomed to an environment

02:38where demand side dynamics drove economic activity. Now it's all about supply shocks. It's trade and tariff

02:44policy. It's immigration and demographics. It's climate change and weather disruptions. It's the

02:50AI revolution that is lifting supply. And the reason why that matters is because those supply shocks have

02:56counter-cyclical effects on output and inflation. On the one hand, they tend to lift output and reduce

03:02inflationary pressures if it's a positive supply shock. But if it's a negative supply shock, it does

03:07exactly the opposite. It reduces your potential supply and increases inflation, which is stagflationary.

03:12We talk about that with energy and power and the AI draw and higher electricity prices.

03:18Greg, does it feel like to you that since you coined this framework, the foundation,

03:24when it comes to artificial intelligence-fueled investment, has become more questionable?

03:28Has that, if you think about it like three legs of a stool, is that stool getting weaker?

03:32It's not getting weaker, but it is an environment where there are certain doubts as to how

03:39much of the investment is viable, is actually productive. There are two strands of investments

03:46when it comes to AI. There is essentially the foundational aspect, developing the infrastructure,

03:51developing the software, developing the cybersecurity element, developing the data centers.

03:56All of that is real investment driven towards supporting this technological revolution.

04:01There is also corporate adoption. A lot of firms want to be ahead of the curve. A lot of questions that

04:07we get are, are we behind the curve? Should we even be investing more? And the fear that I have

04:12is that sometimes this FOMO sentiment leads to inadequate capital allocation, where essentially

04:19we're just spending money on AI, but what's the real end use? What's the productivity gain down the line?

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