1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 29
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
gains, boost corporate profits, and lower prices over time. These forces gave way to a virtuous
cycle of growth, investment, and rising living standards.
Technological innovation has historically fueled economic growth and output, enabled by
productivity which boosts profits and lowers prices
80
Real GDP per capita (000s)
70
60
50
40
1st Industrial
2nd Industrial
Revolution
30
Information
Age
Mass
Production
Age
20
10
0
1800
1831
1862
1890
1921
1951
1982
2012
Source: Maddison Project Database, Bureau of Economic Analysis, Bloomberg Finance LP, Scotia Wealth Management | Real GDP per capita is based on U.S. data
and uses values from Madison Project Database up until 1947. Post-1947, data from the BEA is used.
We think artificial intelligence (AI) may be the next transformative technology, but with one major
difference than past waves of innovation. Unlike prior technologies that relied primarily on human
learning, physical capital accumulation, or incremental process improvements, AI is the first
broadly applicable recursive technology with an endogenous improvement engine that learns
from its own outputs, using generated data and feedback loops to continuously improve
performance. As models advance, deployment may become cheaper and more efficient,
suggesting that the marginal cost of scaling AI solutions should decline over time. Productivity
gains, in turn, have the potential to compound rather than accrue linearly, raising the prospect
that the AI capital super cycle represents not a one-off productivity boost, but a self-reinforcing
one with lasting implications for growth, profits, and capital investment.
Recursive productivity has meaningful macroeconomic implications. In broad terms, sustained
improvements in AI-driven efficiency should lower production costs and reduce prices for goods
and services over time. Lower unit costs support margin expansion, while falling prices raise real
purchasing power and stimulate output. Over the long run, this dynamic is inherently
disinflationary.
At the same time, income gains from these productivity improvements are likely to accrue
disproportionately to owners of capital rather than labour. In economic terms, this implies a rising
capital share of income relative to the labour share, a trend that has been underway for several
decades. This strengthens the long-term case for owning equities, as capital owners capture a
growing share of productivity gains. However, it also raises important concerns around inequality.
If median income growth fails to keep pace with productivity and job displacement risks increase,
aggregate demand could weaken, ultimately prompting a policy response from governments.
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