Capital Economics warned that the artificial intelligence investment boom faces sustainability challenges as technology giants spend billions on infrastructure without matching revenue growth. The five largest US hyperscalers—Amazon, Alphabet, Microsoft, Meta Platforms and Oracle—plan to spend $800 billion on capital expenditure this year, with spending projected to reach $1 trillion or more in 2027.
The firm expects AI investment growth to slow in 2027 before falling roughly 10% in 2028. Capital Economics estimates that AI-related revenues from external customers must reach between $1.7 trillion and $1.9 trillion by 2030 to justify the spending, compared with current revenues of $150 billion to $200 billion. That would require revenues to increase ninefold to 12-fold in four years.
Capital Economics identified three potential revenue sources: productivity gains that allow AI providers to capture additional economic output, displacement of existing software and business-services providers, and savings from reduced labour costs. Achieving the required returns would demand much larger productivity improvements and a more significant transfer of income from workers to capital than the firm currently expects.
Physical constraints could limit expansion. Shortages of advanced semiconductors and electricity, plus rising opposition to data centres over land, power and water consumption, could delay projects. Political pressure following Democrats' gains in US midterm elections could result in tighter planning restrictions at the state level.
AI investment has recently added around 0.3 percentage points to annual US GDP growth. As spending growth slows, this contribution could largely disappear next year. A 10% decline in AI investment in 2028 could reduce US GDP by another 0.1 percentage point.
Taiwan and South Korea face greater exposure because of dependence on AI-related manufacturing and exports. Capital Economics estimates that diminishing AI demand boost could reduce annual real GDP growth by around three percentage points in Taiwan and one percentage point in South Korea next year. The impact could deepen in 2028, reaching 5.5 percentage points in Taiwan and 1.5 percentage points in South Korea.
Disappointing investment returns could create financial spillovers. Hyperscalers increasingly turn to external financing including debt issuance, equity financing, leases and private credit. Outstanding hyperscaler bonds amount to about $500 billion, roughly 6% of the $8.3 trillion US non-financial corporate bond market.
Despite the risks, Capital Economics does not expect an abrupt collapse in AI investment or severe economic downturn. The firm expects the AI investment boom to adjust to a more sustainable pace rather than signal the end of AI's economic potential.