The Digital Transformation of the Global Economy

In a new Must C report, a team led by Nathan Sheets delves into the global economy’s digital transformation, which has seen a shift from ecosystems characterized primarily by flows of physical goods to ones predicated on data and information. A key result of this shift has been increased efficiency, a trend that seems likely to accelerate given the recent emergence of generative AI, or GenAI. The digital economy looks poised to be a key driver of global economic growth through the coming decade.

This digital transformation consists of three related processes: digitization of existing activities; the development and production of physical goods needed to support the digital economy or interact with it; and the emergence of new types of activities that weren’t feasible (or even conceivable) in the physical economy. That adds up to an expansive footprint: Roughly two-thirds of the global population accessed the internet last year, and Facebook has 3 billion active users.

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 report, we consider developments in key industries that produce digital products — hardware, software and the internet — as well as “downstream” industries feeling appreciable effects, such as electrical equipment, retail, and media & entertainment. AI’s rise is driving demand for more sophisticated chips, faster and more flexible networking equipment, and increased data-center capacity, as well as software and internet services. AI-related spending on hardware, software and services could grow 30% annually over the next few years. Downstream firms are also seeing benefits, and the “creator economy” is transforming advertising, entertainment, and social media. For example, online advertising now accounts for 70% of overall spending on 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.