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New research shows how the AI revolution could benefit the UK currency.
Deutsche Bank analyst Shreyas Gopal has said the particularly rapid diffusion of AI tools in the UK could be set to boost the country's productivity, which can in turn benefit the pound.
But this is a long-term play, and the adoption of AI will have potentially negative short-term repercussions for the labour market.
In one of his regular thought-leader research notes, Gopal says:
"On one hand, AI has the potential to further increase productivity in services sectors. On the other hand, it could see some erosion of the UK's (Anglophile) comparative advantage to the rest of the world."
"Fast forward six months, and the tentative signs are positive from a UK perspective."
A recent Morgan Stanley research report caused waves after it revealed UK businesses reported an average 11.5% increase in productivity aided by AI.
However, this was not the reason the report was widely covered; it was the revelation that the adoption of AI came at the cost of jobs that proved the hook.
This makes sense: a company that produces more with fewer people has seen a productivity boost. Economic theory suggests that productivity is a powerful driver of wealth and living standards and, over the long term, a huge benefit to an economy.
Deutsche Bank's Gopal says the dynamic is playing out in the following chart:
He explains that we are seeing exports increasing while employment falls.
"There's a nascent but nevertheless notable divergence. Ignoring distortions around the pandemic, only in 2023 was there a six month period where the divergence between rising export orders and falling employment was stronger, as the second chart shows," he explains.
For pound sterling, the development has potentially supportive implications long-term:
"While in the employment indicator falling is of course unwelcome in isolation and from a cyclical perspective, the divergence could be seen as further evidence that faster diffusion of digital and AI tools are raising efficiency and productivity in the UK, in a manner that could be structurally supportive of the pound in the longer-term," says Gopal.
