Is the AI bubble bursting? Thursday’s big stock market drop in the US was striking and while there will no doubt be ups and downs to come, it felt different from the bouts of nerves that have surfaced in recent months. A lot is at stake for Ireland here, with the economy operating as a kind of offshore hub of US multinationals and some of the key AI players among the State’s biggest employers and taxpayers.
The Democratic victory in the midterm elections has put the focus on public opposition to the roll-out of data centres vital to the AI project. These projects – and related investments in areas like chip manufacturing – have driven the US investment boom, a key factor supporting economic growth. But the political impact of public opposition to these massive energy-guzzling centres is one of the stories of the midterms.
And that is why the markets took fright on Thursday – there is no doubt that data centres now face a more difficult political backdrop. Regulation of the sector is likely to tighten, with investigations expected into the financial links between the Trump administration and the tech bros.
The question is whether this just means some slowdown and extra cost in the AI roll-out or something more serious. The high valuation of tech stocks, the huge AI infrastructure arms race and the increasing reliance on borrowed money to fund it all are part of what is causing nervousness in the market. Add in the circular nature of many of the financing deals involving AI and chip companies and, as Central Bank governor Gabriel Makhlouf put it in a reference back to the financial crash, “some of this looks uncomfortably familiar”.
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This was already in play before the midterms and many tech share prices were already off their highs. But, as often happens in markets, a piece of news can seem to clarify investor worries and lead to a change of mood. In this case, it was the Democratic win.
This does not mean it will be all downhill from here on the markets. US shares steadied on Friday, but there was no convincing recovery. There may well be periods of calm or revival. But it does renew the focus on the risks. Trump’s cheerleading of the sector and his wish to “beat” China in the AI race will now face pushback not only from Democrats, but from within his own ranks. While the economics of the AI bubble are now in question, so too are the politics.
This has implications for Ireland. The most obvious is the risk of a hit to the profitability of US multinationals based in Ireland – and thus to the taxes they pay – and to growth in the US, one of Ireland’s biggest markets. Equity investors and pension funds would also feel the effects of any sustained market slump.
The impact on worldwide data centre and AI-related investment is also worth watching, because this has been a key source of investment growth in Ireland’s economy over the past couple of years. According to the recent Central Bank quarterly bulletin, “much of this investment is allied to a small number of large multinational enterprises in the ICT sector that is focused on AI and data centre investments”. Imports of data centre and related equipment into Ireland in the second quarter of this year alone was a record €7.7 billion, it said.
Some of these imports are then reflected in exports of AI equipment, indicating, according to an Ibec analysis, that Ireland has developed as a kind of international trading point for these products. Some are subjected to further processing in Ireland, including advanced microchips, or hardware designed for data centres, before being shipped overseas.
Ireland’s place in the AI world is unlikely to be in the area of developing new large language models or, indeed, as a location for the massive-scale AI-related data centres. In Europe, many of these are likely to land in bigger economies such as France and Spain, or countries like Finland with abundant energy. But the State’s exposure to all things AI – as the European home to so many big players – is nonetheless significant.
The building of data centres will still be a key debate in Ireland, of course. Despite the attempts of the Government data centre strategy to tie these to investments in renewable energy, the reality in the short term is that they will continue to draw from more traditional energy sources, putting pressure on the energy grid.
A Government-commissioned report from KPMG earlier this year made the argument that this investment was a vital part of the overall drive to retain and attract technology investment to Ireland. The evolution of this argument will now be very interesting to watch in light of what is happening in the US. Can a new equilibrium be reached with a slower build-out of data centres internationally and less financial risk? How does Ireland play the game, after years of doing everything to make things easier for multinationals in return for jobs and tax? And might the big US companies even try to build more data centres internationally, given the opposition at home?
The immediate question is what happens as all these issues are worked out. The AI edifice is increasingly built on a stack of debt that needs to be financed and on share prices and financing structures based on relentless growth. Like a bicycle, it needs to keep moving forward or the whole thing falls over.
It could keep going for a bit yet, particularly if there is some solution to the Gulf conflict. But this week has shown clearly that concerns are growing. Investors are starting to recall that the old reassurance for market bubbles – “this time it’s different” – usually does not end well. How this plays out will be important to Ireland’s economic prospects. A gradual deflation of the AI exuberance – dare we say a “soft landing” – is possible. But so is a more malign outcome.
