CIO Insight: The Economic Risk if AI Delivers

While AI- skepticism runs high, there’s been a lot less investor focus on the implications should AI deliver. Historical parallels suggest a modest productivity boost translating into 30-50 basis points of gross domestic product (GDP) uplift for a decade, before the economy reverts to trend. But AI’s potentially universal application and “agentic” ability to replicate human output hint at a far bigger impact that poses a potential risk scenario for the economy as AI delivers.

We call this risk “the fatter K scenario.” A "K-shaped recovery" describes an economic rebound where different parts of the economy recover at different rates, creating a split that resembles the letter "K" on a graph.

We’re currently seeing a K-shaped disconnect between the AI-fueled stock boom and the labor market, as Figure 1 below shows. One potential risk scenario for the economy is that AI increasingly weighs on white-collar jobs even as productivity rises. The labor market already looks fragile; companies have paused hiring given tariff uncertainty while anticipating AI productivity gains to come. A move to shed labor outright could fatten the bottom branch of the K, squeezing median and youth consumers. 

Typically, such a scenario would impact growth and might lead to a recession, but if AI is delivering productivity gains and driving an investment capex boom, then GDP might remain near trend even as the unemployment rate rises—a very unusual scenario.  

How markets react to the “fatter K” scenario is tricky to predict. If median-consumer weakness drives disinflation and the unemployment rate rises while growth stays near trend, the Federal Reserve could cut aggressively. Lower rates may not save jobs but could be risk-positive for markets.  

While we are certainly on the lookout for AI disruption to the labor market, our base case is that 2026 growth ends up in the 1.5–2.0% range, with AI-driven capex and productivity gains continuing to drive economic momentum. Payroll gains are likely to stay weak and the unemployment rate below 4.5%, as companies refrain from shedding labor for now in line with historical productivity booms where labor shedding comes later.

Figure 1: There is an unprecedented gap between the AI-fueled stock boom and US job openings

Source: Bloomberg, L&G – Asset Management, America. Data as of November 13, 2025. SMA refers to smoothed moving average.

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