A sharp correction in equity markets combined with a pullback in artificial intelligence (AI)-related investment could have significant economic implications, according to Fitch Ratings. The rating agency's September Global Economic Outlook modelled a downside scenario involving a 35 per cent decline in US equity prices and a 15 per cent fall in non-US equities. This scenario pointed to a significant deterioration in economic activity, with the US economy entering recession and global growth coming close to stagnation in per capita terms.
The AI boom is currently providing significant support to the US economy through rapid growth in technology capital expenditure and, indirectly, through higher equity-market wealth that is supporting consumer spending. However, some measures of equity valuations appeared highly elevated, and future profits from AI investment remained uncertain. These factors create risks to economic growth if equity prices correct sharply or companies reduce spending on technology infrastructure and other AI-related investments.
Fitch estimates that growth in both the eurozone and China would be 0.8 percentage point below its baseline forecast in 2027 under the downside scenario. Canada and Mexico would face the biggest impact because of their strong trade links with the US, while economies with large information technology and semiconductor industries, including South Korea, would also be affected. The shock would generate strong disinflationary pressure, prompting the US Federal Reserve to cut interest rates aggressively.
The downside scenario comes against a broader outlook in which Fitch expects the global economy to remain resilient in 2026. The agency has raised its global GDP growth forecast for 2026 to 2.6 per cent from 2.4 per cent earlier, while retaining its 2027 and 2028 forecasts at 2.5 per cent and 2.6 per cent, respectively. This suggests that the potential recession in the US and global growth slowdown are not inevitable, but rather a possible outcome depending on various factors.
Fitch also noted that US private-sector investment is currently being supported by the AI capital expenditure build-out, with its US growth forecasts for both 2026 and 2027 raised to 2.1 per cent. The rating agency's analysis highlights the potential sensitivity of future growth to the sustainability of the AI investment cycle. A sharp correction in equity markets and a pullback in AI-related investment could have far-reaching consequences for the global economy.
The report said that the results of the scenario pointed to a significant deterioration in economic activity, with the US economy entering recession and global growth falling below 1 per cent, close to stagnation or recession in per capita terms. The US economy would experience a GDP decline of 0.6 per cent in 2027 under this scenario. This would have significant implications for policymakers and businesses, who would need to respond to the changing economic landscape.
In conclusion, Fitch Ratings' analysis suggests that a sharp correction in equity markets and a pullback in AI-related investment could have significant economic implications, including a potential recession in the US and a slowdown in global growth. The agency's baseline forecast remains resilient, but the downside scenario highlights the potential risks to economic growth and the need for careful monitoring of the situation.
Key points
- Fitch Ratings warns of potential recession in US and global growth slowdown due to AI-driven market correction.
- AI boom currently supports US economy through rapid growth in technology capital expenditure and higher equity-market wealth.
- Downside scenario highlights potential sensitivity of future growth to sustainability of AI investment cycle.
