Andrew Bailey warns of AI global downturn

Further to Andrew Bailey’s AI downturn warning, expert response comment from Capital.com.

Daniela Hathorn, Senior Market Analyst, Capital.com said:

“I think Bailey’s warning is important, but I’d distinguish between AI causing a downturn and an AI correction amplifying one. His argument is really about financial stability: stretched valuations, leverage and increasing concentration in a small group of AI-related companies are becoming interconnected in ways that could make a future correction much more disruptive than a normal sector sell-off. The FSB specifically highlights leverage interacting with high valuations, market concentration and AI optimism as a potential amplifier of a disorderly correction.

The cross-investment point is particularly interesting. The AI ecosystem is increasingly circular: hyperscalers invest in AI companies, those companies spend heavily on cloud infrastructure and chips, and the resulting revenue helps justify further capex and higher valuations across the ecosystem. There is nothing inherently problematic about that while demand and monetisation continue growing. But it does increase correlation. If investors suddenly question the returns being generated from AI capex, weakness could spread simultaneously across semiconductors, hyperscalers, data-centre infrastructure and the private companies financed around them. The FSB has previously warned that vertical integration and concentration across cloud, models and specialised hardware can reinforce dependencies on a small number of providers.

That links quite neatly with the competition-for-capital story I’ve been talking about. AI is no longer being financed purely from Big Tech’s enormous cash flows. The infrastructure buildout increasingly involves debt markets, utilities, data-centre operators and private credit at a time when governments themselves have enormous financing requirements. If the expected returns on AI investment were suddenly marked down, you could therefore get something more consequential than falling technology shares: tighter credit conditions, weaker investment, forced deleveraging and potentially a pullback in the capex boom that has itself become an important source of economic growth. Bailey’s concern about leverage matters because leverage can turn a repricing into forced selling through margin and collateral calls.”