Economists warn AI spending bust threatens world economy

Sharp swings in global stock markets since the U.S. midterm elections show that a collapse in artificial-intelligence spending would not stay in the United States, The Wall Street Journal reported on Wednesday. The newspaper said U.S. data-center investment has supported weak global growth during an energy crunch caused by the Iran war, and has driven export booms in China, Taiwan and South Korea.wsj.com

"There is very little that can be done to prevent a global recession should the AI boom collapse," Frederic Neumann, chief Asia economist at HSBC, told the Journal.wsj.com

Whiplash after the vote

The New York Times ↗ 0.17% described a relief rally right after the election, then the worst decline in almost two years. The Times said the drop came after disappointing earnings from several AI companies, and as investors considered what Democratic control of Congress and state-level wins could mean for the industry. Many newly elected Democrats have promised to regulate AI. On November 5, the Nasdaq Composite fell 5.5% and entered correction territory. The next day in Asia, SK Hynix ↗ 9.71% dropped more than 10%.nytimes.com+2

Stocks have since won back much of that ground. On Wednesday, the S&P 500 ↗ 1.32% moved close to recovering all of the previous week's sell-off, helped by better-than-expected results from CoreWeave ↗ 24.71%, the Associated Press reported. Taiwan Semiconductor Manufacturing Co. ↗ 4.25% said its October revenue was nearly six times what it was a year earlier. Nvidia ↗ 2.87% has faced separate pressure from a controversy involving its CEO, which wiped more than $427 billion off its market value over two sessions.apnews.com+2

Benchmarks are still well below their peaks. As of Tuesday's close, the Nasdaq was 10% under its high for the year, Japan's Nikkei 225 was down 16%, and South Korea's Kospi was down 42%, according to the Journal.wsj.com

Exports concentrated in AI

So far the stock swings have not spread to the real economy. China's exports rose 35% year over year in October, and South Korea's rose 93%, according to CEIC data cited by the Journal. However, Capital Economics warned that up to 80% of recent export growth has come from AI-related goods. That leaves trade exposed to any slowdown in U.S. data-center spending, especially in economies where consumer demand is weak.wsj.com

"AI capex will turn from a major prop to a drag on world trade," Marcel Thieliant of Capital Economics wrote, according to the Journal. Economists point to the dot-com bust as a guide. U.S. imports of IT equipment, measured as a share of GDP, fell 55% in two years from their mid-2000 peak, according to Oxford Economics, and world growth fell to 2% in 2001.wsj.com

Gaurav Ganguly of Moody's Analytics, part of Moody's, said a sharp AI stock slide on top of an oil shock, tariffs and rising interest rates could bring "a severe economic shock with global recessionary consequences."wsj.com