Does the AI carnival conceal the risk of a pullback? ECB Governing Council: Expectations are that if it falls short, the market will be very vulnerable

The Zhitong Finance App learned that ECB Governing Council member Fabio Panetta warned that technology companies' overly optimistic valuations could put the market at risk of a sharp correction.

“Current asset prices reflect optimistic expectations for the future profitability of AI,” the governor of the Bank of Italy said in a speech on Monday. “These valuations help technology companies raise capital and maintain further investment, but when expectations are not met, they can also make the market vulnerable to a sharp correction, as illustrated by recent fluctuations in technology stocks.”

As billions of dollars pour into the field of AI technology, concerns about AI-related risks have intensified, sparking debate about whether valuations are already too high and what a sharp market pullback might mean for the global economy.

Panetta also discussed the benefits and risks of AI's rapid development. ECB officials have repeatedly stressed that Europe cannot be left behind in the AI wave. Bundesbank President Joachim Nagel said earlier this month that AI will be a “litmus test” for Europe.

“For monetary policy, the implications are clear: simply evaluating the productivity benefits of AI is far from enough,” Panetta said. “We also need to understand who benefits from these benefits, because the way they are distributed will help shape aggregate demand and ultimately affect inflation.”

He said that according to estimates from his agency, the widespread application of AI in Italy may increase the annual growth rate of labor productivity by more than 1 percentage point.

However, considering the intertwining of multiple variables, it is difficult to estimate the full impact of AI.

“The timing, scale, and mode of transmission of these effects are all highly uncertain,” Panetta said.

He analyzed that if AI mainly creates new tasks and increases expected labor income, families will develop a sense of added wealth and are more confident about the future. This will boost consumption and further boost the investment boom, which in turn may lead to longer-lasting inflation.

“Conversely, if automation takes the lead, rising uncertainty in employment and wages may prompt households to save more and spend less,” he said. “Weakening consumption may partially offset the investment boom and make the deflationary effects of AI appear earlier.”