Bank of England pours cold water on AI productivity boom

The Bank of England has expressed skepticism about the productivity benefits of artificial intelligence (AI) in the UK. According to its latest Monetary Policy Report, AI has only increased UK productivity by an estimated 0.5 percent over the past three years. This amounts to only 0.1 to 0.2 percentage points of additional annual growth since early 2024.

While AI investment may be contributing to current demand strength, there is limited evidence of significant AI-driven productivity growth across industries. Even sectors heavily reliant on AI, such as information and communications, have not seen productivity growth surpass pre-pandemic levels. The bank estimates AI-related activity has accounted for just under a fifth of UK GDP growth since the start of 2024, primarily stemming from companies developing and deploying AI technologies rather than businesses becoming more productive through its use.

The central bank also cautioned against attributing Britain's recent productivity improvements solely to AI. Many of the gains appear to be due to businesses reducing their workforce amid higher employment costs, rather than the technology itself. Despite predictions of widespread AI job losses, firms surveyed by the Bank reported little overall impact on employment.

AI is causing businesses to be less inclined to hire new staff or replace departing employees. Other studies suggest companies are still not reaping the expected productivity gains from AI. A Gartner survey found that only 3 percent of organizations have achieved AI productivity targets, while 38 percent are over budget on AI spending.

A February study of nearly 6,000 executives found that over 80 percent of firms have seen no discernible impact from AI on employment or productivity. The mismatch between AI spending and actual returns has raised concerns among financial regulators. The International Monetary Fund warned that this spending spree could backfire if promised profits do not materialize, potentially dragging the wider economy down.

The Bank for International Settlements compared the current AI spending surge to the dotcom boom of the 1990s, cautioning that tech giants are committing vast sums based on the assumption that AI will eventually deliver enormous returns. Despite these concerns, the bank remains cautiously optimistic. It expects AI to add around 0.9 percentage points to annual productivity growth over the next three years, with gains split between faster output growth and slower employment growth.