Is the AI boom losing steam? Global economy faces growing risks

Global financial markets are facing mounting pressure from geopolitical conflicts, rising government debt and trade tensions, with signs of stress emerging across major economies. From soaring bond yields in Japan and France to weakening emerging-market currencies, investors are increasingly questioning the resilience of the global economy as the artificial intelligence-driven market rally shows signs of strain.

The multitrillion-dollar AI investment boom has helped push global stock markets to record highs and fuel expectations of around 3% global economic growth this year. However, rising borrowing costs, persistent inflation and uncertainty over US trade policies and the Iran war threaten to undermine investor optimism.

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According to Reuters, investors are increasingly concerned that higher interest rates, geopolitical shocks and mounting debt could expose vulnerabilities across financial markets.

Former Goldman Sachs chief economist Jim O'Neill warned that rising rates could expose countries and businesses with excessive debt exposure. He also cautioned that debt-financed AI investments could become increasingly risky if inflation remains elevated.

AI Stock Selloff Raises Concerns

Market jitters intensified in October as investors pulled money out of technology stocks and moved towards safer assets. More than $2 trillion in market value was wiped off the Nasdaq 100 as concerns grew over whether massive AI investments would generate adequate returns.

Reuters reported that credit insurance costs for some technology companies surged, while several proposed data centre projects struggled to secure financing.

The selloff triggered a flight towards government bonds. The US 10-year Treasury yield fell nearly 20 basis points on October 22, its biggest single-day decline since early 2023, although it remains around the 5% level.

Financial strains have also emerged in France, where bond yields have reached levels last seen during the 2012 eurozone debt crisis. In Japan, government bond yields have climbed to 30-year highs, increasing pressure on policymakers.

Mike Riddell of Fidelity International highlighted growing financial vulnerabilities in France and Australia, including a deep housing market downturn, Reuters reported.

Read more: South Korean shares slide nearly 3% as tech selloff deepens; won strengthens

Heavy Dependence on AI Spending

Despite market concerns, corporate earnings remain relatively strong. According to LSEG data, 84% of S&P 500 companies that reported third-quarter results beat consensus estimates.

However, much of the market's resilience has been supported by massive AI investments. According to Danske Bank estimates, major US technology companies are expected to spend around $1.2 trillion on AI infrastructure next year, following an estimated $900 billion this year.

Technology and AI-related stocks account for more than 40% of the S&P 500 and have driven much of its gains over the past five years.

Former Federal Deposit Insurance Corporation chair Sheila Bair warned that growing reliance on debt among AI companies and expanding financial-sector lending could create vulnerabilities similar to those seen before the 2008 financial crisis.

Iran War and Record Debt Add to Risks

The prolonged Iran war has disrupted oil supplies and pushed crude prices to around $105 per barrel, up nearly 75% this year. Higher energy costs have intensified inflationary pressures and weakened currencies in emerging economies, including Indonesia and the Philippines.

Reuters noted that global debt has exceeded $350 trillion, according to the Institute of International Finance, leaving governments with limited room to respond to another major economic crisis.

The Bank of England has also warned that geopolitical uncertainty increases the likelihood of major global shocks that could compound one another.

Meanwhile, foreign investors' net purchases of US securities reached nearly $280 billion in August, a monthly record, according to Treasury International Capital data. This could increase the risk of financial stress spreading across global markets if the US market corrects.

With US midterm elections, geopolitical tensions and central bank policy adding to uncertainty, investors are increasingly concerned that a slowdown in AI spending could expose deeper weaknesses in the global economy, Reuters reported.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)