AI Bubble Bursts: Bank of England Warns Global Economic Downturn Looming

Bank of England Governor Andrew Bailey has sounded an alarm about the potential for a global economic downturn caused by the bursting of the AI bubble. In a letter to G20 finance ministers, Bailey warned that a 'future market correction' could spread across the world if the current AI hype is followed by a sharp decline in value.

The warning comes as Chancellor John Healey has announced a £100 million fund aimed at supporting British AI start-ups. The government sees this investment as crucial for growing the country's homegrown 'Sovereign AI' capacity, reducing its reliance on foreign services and infrastructure.

Bailey highlighted that markets remain vulnerable to a potentially disorderly correction that could spread across borders due to the fragility of sovereign debt markets and high valuations in the tech sector. He emphasized that leverage is interacting with market concentration, particularly between AI companies and hyper scalers, which could amplify a future market correction.