AI automation can stall growth by shrinking consumer demand
Shrinking consumer demand can stall AI-driven innovation, a Bank for International Settlements (BIS) working paper published on October 12, 2026 finds. Its calibrated model identifies demand bottlenecks as a highly plausible outcome.
Automation meets a demand ceiling
Large-scale AI automation raises investment's share of output at the expense of consumption in the paper's model.
As consumer markets shrink relative to output, returns from consumer products decline, weakening incentives for further AI innovation.
In the transformative scenario, growth reaches 5.5 percent after two decades and continues rising.
In the demand bottleneck scenario, growth briefly accelerates before falling below the pre-AI rate of 2 percent as innovation permanently slows.
Intermediate scenarios deliver at most moderate growth gains.
The calibration identifies the bottleneck outcome as highly plausible, contrasting with recent estimates of growth exceeding 10 percent within a few years under transformative AI.
Consumer rents finance AI advances
The BIS paper uses a task-based endogenous growth framework in which research and market entry drive AI advances.
Consumer demand must fund those activities through rents on consumer products.
Outcomes depend on how quickly AI technologies arrive, how long rents persist and other parameters disciplined by evidence.
The calibrated model projects more moderate growth than recent studies, including Korinek et al. (2026).
The range of scenarios also leaves considerable uncertainty about the natural rate of interest.
Productivity is not enough
In this framework, automation alone does not secure sustained faster growth.
Consumer-funded innovation can weaken even as machines become more capable.
The paper identifies demand bottlenecks as highly plausible, while retaining a range of growth and natural-rate outcomes.
Source: Transformative AI and demand bottlenecks
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