The Bank of England has issued a strong warning about the potential for an AI bubble to trigger a recession in the UK, amidst increasing investor focus on tech stocks. Governor Andrew Bailey highlighted a "triple whammy" of AI-related risks: excessive investments in AI companies, a slower pace of AI adoption than anticipated, and lingering questions about which firms will ultimately succeed in the sector. The Bank's financial stability report projects that a price correction in AI stocks, driven by changes in productivity and profitability, could lead to a 2.2% decline in UK GDP.
The report identifies that such a market correction would impact the UK macroeconomy and financial system through international spillovers, even though UK equity indices are less directly exposed to AI companies. Equity market effects are estimated to account for about 36% of the economic hit, with bond market turbulence contributing roughly half. This concern comes as hedge funds have significantly increased their positions in semiconductors and other AI-related stocks, with AI companies now representing half of the US S&P 500, a substantial increase from 25% in 2022.
Further complicating the outlook are the massive infrastructure requirements for the AI boom. Expectations for capital expenditure from AI hyper-scalers in 2028 have surged from under $600 billion to over $1 trillion. The Bank also pointed to "self-reinforcing capital loops," where tech companies invest in AI firms that then buy products from those same tech companies, increasing the risk of widespread negative earnings re-evaluations if a negative shock occurs. Moreover, Morgan Stanley projects that over half of the external financing needed for data centers from 2026 to 2028, potentially $700 billion, could come from private credit, a sector already facing financial stability concerns. The report noted that AI hyper-scalers like OpenAI and Anthropic increased their share of US investment-grade debt from 3% to 15% between the end of last year and May 2026.
In addition to market risks, the Bank of England warned about operational and cyber risks, stemming from the increasing complexity and reliance on AI technology. Advanced AI models could enhance the sophistication of cyber-attacks, posing a threat to financial firms and market infrastructure. The report also highlights a lack of transparency around AI companies' financing, making it difficult for financial firms to assess their direct and indirect exposures to the AI ecosystem. Despite these growing vulnerabilities, including "more pronounced" risks in private credit, the Bank emphasized that the UK banking system itself remains resilient.
