Here’s what happens to Britain’s economy if the AI bubble bursts

The Bank of England has modelled what would happen to the UK economy if AI stocks crash, and it does not look good.

In its Financial Stability Report for July 2026, the Bank of England looked at how disruptions to the share prices of AI companies could affect the UK economy, which is heavily exposed to the US tech market.

Staff at the Bank of England looked at a specific scenario – one where valuations of AI companies plummet suddenly with long-term implications (dropping by 45% over six quarters).

In this scenario, the resulting shock would impact heavily on the United Kingdom, causing a 2.2 percentage point drop in GDP.

This GDP shock would be driven mostly by financial channels, and while it would have a significant impact on households, the Bank of England said an equity correction alone could be faced by banks with resilience, based on previous stress tests.

However, it noted that a reassessment of AI companies’ prospects could have knock-on financial effects which could exacerbate volatility and market shocks.

In its hypothetical scenario, US Treasury and gilt markets continued to function well despite the collapse of AI companies. If this were not to be the case, the Bank of England said there could be ‘more significant’ consequences for the UK’s financial stability.

The risks of runaway investment

Modelling the exposure of the UK to rapidly accelerating AI investment, the Bank of England noted that AI companies are increasingly turning to debt financing to support building more data centres and scaling their infrastructure.

While the risks posed by this so far have been relatively contained, the Bank of England notes that if the scale of AI debt financing grows as expected over the coming years, a price shock for AI companies would have a material impact on global finance.

The resulting shock to global financing conditions would have a serious impact on the UK real economy, the Bank said.

It also noted that expectations have been somewhat conservative and have been regularly revised upwards, which will likely lead to greater demands for external finance and greater exposure of global finance to AI company valuations.

The UK is also exposed to risks from the AI sector through other mechanisms. Britain has the largest data centre pipeline in Europe, which will require significant investment to roll out.

With AI investment projected to grow, these infrastructure projects could support UK growth and yield benefits for financial stability, but they could also further tether the UK’s economy to the adoption and success of AI.

UK remains resilient despite challenges

In his opening remarks to the latest Financial Stability Report, Bank of England Governor Andrew Bailey said that risks in equity markets, particularly related to AI, persist and have become more significant.

“The vulnerabilities previously highlighted by the FPC persist, and, since our last FSR have in some ways become more pronounced, driven by increased leverage, particularly in equity markets,” he said.

“Developments in frontier AI underscore the importance for firms of appropriately managing cyber and operational risk.”

Bailey said that the Financial Policy Committee (FPC) has decided to maintain the UK countercyclical capital buffer (CCyB) rate at a neutral rate of 2%.

“Despite the challenging external environment, the FPC judges that in aggregate, households and corporates remain resilient, but we acknowledge that some vulnerable, low income households and smaller, more leveraged corporates, which are financed by riskier credit markets, remain more exposed,” he said.

“The UK banking system remains appropriately capitalised with high levels of liquidity.”

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