Citi Bank – Global Economy‘s Digital Transformation

Taking Off on the Virtual Progress Wave

A team led by Nathan Sheets explores the digital transformation of the global economy in a new Must C report. This transition has resulted in ecosystems that are now based more on data and knowledge than on flows of physical things.

One of the main effects of this shift has been increased efficiency, and this trend seems destined to pick up speed with the recent development of generative AI, or GenAI. The global economy is expected to grow at a significant rate over the next 10 years, mostly due to the influence of the digital economy.

The digitalization of current activities, the creation and manufacturing of physical goods required to interact with or support the digital economy, and the emergence of new activity types that weren’t possible (or even imaginable) in the physical economy make up this digital transformation. All of that comes down to a large footprint: With 3 billion active Facebook users, the internet was accessed by about two thirds of the world’s population last year.

There’s no settled methodology as to how the digital economy should be defined or measured. For the U.S., a narrow measure puts it at 7% of nominal GDP; a broad measure yields an estimate of more than 20%. But however it’s measured, it’s clear that the digital economy is expanding rapidly. According to the U.S. Bureau of Economic Analysis, the nation’s digital economy grew more than 7% annually during 2017–2022, vs. 2.2% for the overall economy. The increasing adoption of GenAI should allow this growth differential to continue at least through the coming decade, driving further increases in the digital economy’s share of GDP. Indeed, we see few practical limits to how high this share could go.

In our analysis, we take into account advancements in major sectors that generate digital goods, including hardware, software, and the internet, as well as “downstream” sectors like media & entertainment, retail, and electrical equipment that have noticeable impacts. The growth of AI is increasing demand for more advanced CPUs, quicker and more adaptable networking hardware, larger data centers, software, and internet services. Over the next few years, hardware, software, and services spending related to AI may increase by 30% yearly. Advertising, entertainment, and social media are being revolutionized by the “creator economy,” which is also benefiting downstream businesses. For instance, 70% of all advertising expenditures are currently allocated to online advertising.

The bottom line is that we are optimistic about the opportunities the digital economy and GenAI are likely to bring, though we acknowledge there are challenges to be addressed, from building a supportive legal and regulatory environment to reducing vulnerabilities to deepfakes, hacks and cyberattacks. At the company level, these new technologies will need to be broadly adopted and integrated into existing workflows. This will require investment and training, and rethinking of ways that business is done.