Kathmandu— GDP grew at just a 1.5 percent annual rate in the second quarter, driven by consumption and non-residential investment but hampered by a large trade deficit and reduced federal spending. Despite robust consumer spending on cars and drugs, there is still no evidence of AI-driven productivity improvements, raising concerns about long-term economic prospects.

Consumption Growth Driven by Specific Sectors

Real spending on durable goods rose at a 6.8 percent annual rate in the second quarter, with new vehicles and parts contributing significantly to this growth, increasing at a 10.5 percent rate. Household furnishings also saw strong growth, rising at a 12.0 percent rate. Spending on drugs grew at a 13.1 percent rate, adding 0.35 percentage points to the quarter’s growth.

However, spending on services was weaker, growing at just a 2.2 percent annual rate. Real health care spending increased by only 1.3 percent after being nearly flat in the first quarter. This decline likely reflects reduced coverage under Medicaid and ACA exchanges.

AI Boom Failing to Materialize

The report highlights a lack of evidence for an AI-driven productivity boom, with productivity growth at just 0.3 percent annually in the first quarter of this year and likely below 2.0 percent in the second quarter due to weak GDP growth despite rising hours worked. Real spending on information processing equipment grew at only an 8.3 percent rate, down from a 39.9 percent rate in the previous quarter, indicating potential caution or input shortages.

Trade Deficit and Federal Spending Impact

The nominal trade deficit increased by $49 billion to $869 billion in the second quarter, primarily due to imported computer chips needed for AI development. Non-defense federal spending fell at a 12.9 percent rate, reversing much of the first-quarter gain, with no clear explanation for this drop.

State and local government spending grew modestly at a 1.1 percent rate, likely constrained by cutbacks in federal aid.

Inflationary Pressures Persist

The overall Personal Consumption Expenditures (PCE) index rose at a 5.1 percent annual rate, with the core PCE increasing at a 3.4 percent rate. Year-over-year inflation was up 3.8 percent for the overall PCE and 3.3 percent for the core PCE.

While not indicative of spiraling inflation, these figures suggest ongoing pressure due to higher computer prices driven by the AI boom.

(With inputs from CounterPunch)

Originally published on abcnews.com.np.