Fierce competition to dominate artificial intelligence risks driving investment spending to excessive levels, threatening the profitability of leading firms and a sharp reversal that could tip some economies into recession, the Bank for International Settlements said Sunday.
In its annual report on the global economic outlook, the Switzerland-based research and coordinating body for central banks said the five largest "hyperscalers" are on course to devote more than $1 trillion to AI-related capital expenditure in 2025 and 2026.
"The race to capture market share may have led to overinvestment," said Pablo Hernández de Cos, general manager of the BIS. "This could leave the sector more vulnerable if AI under delivers, possibly bringing the current investment boom to an abrupt end."
The BIS noted that previous episodes in which very large sums were quickly invested in new technologies-such as canal construction in the 1830s, British railways in the 1840s, electrification in the late 1920s and the dotcom boom of the late 1990s-all led to busts with severe consequences.
"These episodes ended with an eventual reversal in investment, inducing economy-wide recessions," the BIS said. "The scale and pace of the current AI investment boom accompanied by expectations of large productivity payoffs bear resemblance to these precedents, highlighting potential downside risks in the near term."
While comparable to earlier technologies in the potential for harm if returns underwhelm, economists at the BIS said AI is potentially very different in its longer-term economic effects.
"If, at some point, AI systems can improve their own capabilities and "create" technology and ideas, the macroeconomic consequences could be profoundly different from past innovations," they wrote. "A key constraint on long-run growth, namely the rate at which humans can generate new ideas, could be lifted."
The BIS said the valuations in equity markets suggest a level of "complacency" among investors about the risks they face. Its warnings come amid a period of volatility in global tech stocks as investors worry that AI profits may disappoint given the very large sums invested.
A big decline in equity prices could have more negative consequences for the economy than past corrections of a similar scale, the BIS said.
"Household equity exposures have grown over the past few decades, both relative to total wealth and income," it said. "A large correction in valuations could have more pronounced wealth effects and sharper consumption pullback than in the past."
The economic fallout from a correction would likely not be confined to the U.S., even though most of the big AI players are based in the world's largest economy. U.S. equities account for a disproportionately large share of global market capitalization, so a sharp fall in prices would likely be felt by investors around the world.
However, the BIS did not recommend that central banks should raise borrowing costs in an effort to tame the investment boom, citing high levels of uncertainty about its consequences.
"Trying to be prescriptive now about how central banks should react is unwise," Hernández said.
While disappointing profits could lead to a sudden withdrawal of financing for investments, the BIS said the rapid development and deployment of AI faces other challenges, including shortages of energy and parts.
"The AI buildout has recently been facing growing bottlenecks in electricity, advanced semiconductors and grid equipment," the BIS said. "These temporary shortages may also amplify overinvestment, as firms attempt to lock in future capacity through long-dated contracts that further expose them to any disappointments in demand."
The voracious appetite for energy and chips also threatens to fuel inflation at a time when the conflict in the Middle East has already pushed the rate of price increases well above central bank-targets.
"Fast-growing demand for computing power is already pressuring electricity prices and input costs, with potential spillovers to inflation," the BIS said.
While the early stages of AI development were largely funded internally, the increased scale of investment plans has led to a greater reliance on borrowing. That means that a bust could destabilize the financial system, particularly since it could spread to firms that build data centers and supply hardware.
"Should hyperscalers slow or halt the aggressive pace of capex deployment, many borrowers across the supply chain could struggle to replace lost revenue and service their debt," the BIS said.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
June 28, 2026 19:30 ET (23:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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