In the AI of the Storm: Can Asia Turn the Hardware Boom into Broad-Based Growth?

We investigated four common transmissions: exports, capex, consumption, labor and productivity to gauge AI’s impact on Asia’s economic growth. Exports are the most direct and significant channel through which Asian economies are currently benefiting from the global AI boom. Taiwan and South Korea are key beneficiaries due to their dominance in producing advanced chips and AI servers. Singapore, Vietnam, Malaysia, and Thailand also stand to gain considerably, thanks to a higher share of GDP of tech exports. Inversely, Indonesia and India have the lowest share of tech exports to GDP, leaving them less equipped to capitalize on the AI-driven export growth.Capital expenditure in AI is primarily driven by North Asian economies like Taiwan, South Korea, Japan, and China, where publicly listed firms are undertaking significant investments. But the outward flow of this capital, with significant investment pledges to the US via trade deals, may potentially divert benefits away from domestic economies. Domestic AI capex in Southeast Asia is limited but inflows are rising, and Malaysia attracts the most AI-related FDI inflows in the region.The consumption channel of AI's economic impact is less clear across Asia. Wealth effects, thanks to increased equity prices driven by AI's growth, are most pronounced in Taiwan, Japan, and South Korea, where households have a higher stake in financial markets. For most EM Asian economies, the impact of such wealth effects is likely to be more limited due to lower savings rates and less financial literacy. Moreover, capex in AI such as data centers is capital intensive and does not significantly boost labor demand. While AI is expected to lift productivity, concerns about job displacement, especially in white-collar roles, could temper consumption growth.The impact of AI on labor and productivity is mixed, with Singapore standing out due to its high preparedness for AI adoption and potential for increased labor productivity. India and the Philippines are face substantial risks to their BPO and IT service sectors as AI-driven automation becomes more prevalent in cognitive-intensive roles. While advanced economies may experience the negative shock of AI on their labor markets more acutely, their higher preparedness could also translate into greater long-term productivity gains.