The recent AI spending and investing boom has helped prop up the global economy amid the strains caused by high interest rates, the Iran war and tariffs, the Bank of International Settlements said in a report published Sunday. But if left unchecked, the increasing deployment of AI could also cause the next major economic collapse, the Basel, Switzerland-based financial institution warned.
"The global economy has been facing what would normally be recessionary conditions — high interest rates, elevated public debt, persistent inflation, and rising geopolitical tensions," Massimo Buonomo, a member of the European Commission who is not connected to BIS, told American Banker. "Under normal circumstances, these factors would have significantly slowed growth. Instead, AI investment has acted as a powerful offset."
The five largest hyperscalers — Alphabet, Amazon, Meta, Microsoft and Oracle — are set to spend over a trillion U.S. dollars on AI-related capital expenditure from 2025 through 2026, the BIS report stated.
"These commitments are outpacing earnings and the free cash flow of these firms, leading some to issue debt to raise additional financing," the report said. There is a "risk of firms over-committing resources to investment projects with still uncertain returns, leaving all firms vulnerable to disappointments in AI payoffs," it stated.
The BIS, known as the central bank of central banks, supports monetary and financial stability through international cooperation.
Its predictive models found that as current AI exuberance and competitive pressure drives capital expenditures higher, the total payoff minus investment costs are likely to decline and could turn negative.
"Disappointment in returns could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust, with potential knock-on effects on financial conditions," the report said.
The related demand for computing resources and electricity are causing overinvestment in electricity and data centers, the report warned, comparing this investment boom to the canal mania of the 1830s, the British railway mania in the 1840s and the dot-com boom of the late 1990s, which all ended with an eventual reversal in investment, inducing economy-wide recessions.
"There are two extremes where this ends badly: AI disappoints, or AI succeeds too fast," Sumeet Chabria, CEO of AI consultancy Thoughtlinks, told American Banker. "A financing reversal is one. The other is a breakthrough that accelerates adoption, where displacement outruns reskilling and every worker you displace is a consumer you lose. The market is pricing the middle."
The current AI investment boom is more fragile than it looks because of how it is being financed, according to Buonomo.
"Large AI investments are not happening in isolation," he said. "They are increasingly supported by complex arrangements between hyperscalers, chipmakers, private capital and non-bank lenders. In some cases, companies are simultaneously investors, customers and counterparties to each other."
For example, a cloud provider may finance an AI startup that, in turn, commits to purchase its computing infrastructure, while chip suppliers extend favorable terms backed by future demand expectations.
"Capital is effectively circulating within the same ecosystem," Buonomo said. "This creates a situation where risk becomes harder to see and harder to measure. If expected AI revenues are delayed or lower than anticipated, these interlinked commitments could unwind quickly, transmitting stress across the broader credit system — not just within tech."
The potential risk of the AI boom is more immediate than in past tech cycles, according to Buonomo.
"During the dot-com era, market exposure was more contained," he said. "Today, AI-driven valuations are deeply embedded in pension funds, ETFs, and retail portfolios. At the same time, AI capex is directly supporting jobs in construction, energy and manufacturing — not just in the tech sector.
"If this investment cycle slows, the effects would not stay in Silicon Valley," Buonomo said. "They would show up in household wealth, business investment and consumer spending much more quickly."
The BIS said policymakers need to assess AI's impacts on growth, financial stability and inflation, and act accordingly.
The report also noted the risk to job creation as companies ramp up their AI use.
"The transition to a more productive AI-driven economy entails risks," it stated. "As more capable AI tools find applications in more tasks and occupations, labor displacement could intensify. Whether or not AI advances to create new jobs — or expands demand for existing ones — sufficiently to make up for such displacements remains uncertain. Unlike past general purpose technologies, AI competes directly with human cognitive abilities, possibly narrowing the scope for workers to move up the value chain or find new non-disrupted tasks."
Overall, the BIS expressed concerns about the effects of AI as well as the emergence of stablecoins and high public debt on the future of the global economy.
"The AI boom has acted as a powerful economic stabilizer — but one that is unusually concentrated and financially complex," Buonomo said. "If investment continues, it can sustain growth. But if returns disappoint and spending slows, the adjustment is unlikely to look like a normal tech correction. It could feed directly into credit conditions, investment cycles, and household demand."
