For many years, discussions regarding credit flow into the global economy typically pointed to China as a key player. Recent analyses reveal a shift, with the United States now representing over half of the total global credit impulse. According to a study conducted by UBS, the U.S. injected approximately $800 billion in net new credit over the past year, translating to around 2.6% of its GDP. An unexpected driving force behind this growth is artificial intelligence, rather than traditional sectors like housing or consumer spending.
Understanding the shift in credit dynamics offers valuable insights. Presently, the global credit impulse, an indicator measuring new credit relative to global GDP, is around +1.3%. Developed economies show a stronger impulse at +2.2%, while emerging markets remain stagnant with negligible growth.
Among developed nations, the U.S. stands out as a significant contributor. While Japan shows signs of a rising credit impulse, the U.S. significantly exceeds it, highlighting its role in global credit expansion. What's particularly noteworthy about this phase is that the growth in credit is mainly driven by increased lending from banks, rather than new bond issuances. This means companies are obtaining funds through loans instead of selling bonds, making bank lending more susceptible to shifts in economic conditions and regulatory changes.
What role is AI playing in this credit cycle? The link between the current credit boom and investments in artificial intelligence is evident. Major technology firms like Amazon, Microsoft, and Google are heavily investing in AI infrastructure, which has become a substantial force in the economy. When these companies allocate funds to build data centers, the resulting financial activity stimulates various sectors including construction, energy, and manufacturing. AI funding has thus established itself as a crucial component of economic demand, with UBS identifying it as the backbone of the current credit expansion.
However, this heavy reliance on artificial intelligence for credit growth introduces certain risks. Should there be disruptions in AI investments—be it due to concerns over profitability, stricter lending criteria, or shifting corporate attitudes—the consequences could be severe. Such uncertainties could stall the flow of credit and impact broader economic performance.
What implications does this have for investors? Investors looking to navigate the financial landscape should recognize that the exceptional performance of U.S. financial markets is grounded in substantial credit generation, which is fueling infrastructure investments. Conversely, potential pitfalls loom if lending conditions become more stringent due to regulatory shifts or rising default concerns. The fallout wouldn’t just impact technology stocks; a concentrated credit impulse signifies that a downturn in AI-related lending could negatively influence equity valuations across a spectrum of industries.
While UBS did not explicitly connect its credit analysis to cryptocurrency markets, it is worth noting that Japan’s growing credit impulse offers limited diversification options. Investors should monitor corporate loan growth data in the upcoming quarters closely. A plateau or decline in bank lending towards AI projects could serve as an early alarm for a broader economic slowdown, potentially affecting global markets.