The global economy could suffer from a severe case of whiplash, the Bank of England has warned, cautioning that a “sudden” shift from the current AI boom to a painful bust is increasingly likely. The Financial Policy Committee (FPC) stated that the “risk of a sharp market correction has increased.”
The boom is characterized by “stretched” valuations and intense hype surrounding companies like OpenAI, now valued at $500 billion. The FPC’s fear is that this rapid forward momentum is unsustainable and could lead to an equally rapid and jarring reversal.
The catalyst for the reversal could be the dawning realisation that AI is not yet the profit engine many believe it to be. A recent MIT study, which found 95% of firms are seeing no return on their AI investments, could be the first sign of the brakes being applied.
The Bank warned that the subsequent bust would not be a gentle slowdown. A “sudden correction” would shatter confidence and lead to a credit crunch, harming households and businesses.
This potential for economic whiplash is made worse by political instability, with the FPC flagging Donald Trump’s attacks on the US Federal Reserve as another major source of risk. For the UK, the FPC warns the “spillovers” from such a sudden stop would be “material” and damaging.