AI boom hides potential correction risks? ECB board member: If expectations fall short, the market will be fragile

According to Jinse Finance APP, European Central Bank Governing Council member Fabio Panetta has warned that the tech companies' valuations are overly optimistic, which could expose the market to the risk of a significant correction.

“Current asset prices reflect optimistic expectations regarding 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 fail to materialize, they also make the market vulnerable to sharp corrections, as recently demonstrated by the volatility in tech stocks.”

As billions of dollars pour into AI technology, concerns about AI-related risks are intensifying, sparking debates about whether valuations are already too high and what a major market correction could mean for the global economy.

Panetta also discussed the benefits and risks of the rapid development of AI. European Central Bank officials have repeatedly emphasized that Europe cannot afford to fall behind in the AI wave. Earlier this month, Bundesbank President Joachim Nagel stated that AI will be a “touchstone” for Europe.

“For monetary policy, the implications are clear: it is far from sufficient to assess only the productivity-boosting effects of AI,” Panetta said. “We also need to understand who benefits from these gains, as their distribution will help shape aggregate demand and, ultimately, affect inflation.”

He stated that, according to calculations by his institution, the widespread adoption of AI in Italy could increase the annual growth rate of labor productivity by more than one percentage point.

However, given the intertwining of multiple variables, it is difficult to estimate the overall impact of AI.

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

He analyzed that if AI primarily creates new tasks and boosts expected labor income, households would feel an increase in wealth and greater confidence in the future. This would drive consumption and further fuel the investment boom, which could, in turn, bring about more persistent inflation.

“Conversely, if automation dominates, rising uncertainty in employment and wages may lead households to increase savings and reduce consumption,” he said. “Weaker consumption may partially offset the investment boom and cause the disinflationary effects of AI to emerge sooner.”