The stock market boom driven by artificial intelligence (AI) long ago seemed to be displaying signs of what former Federal Reserve chairman Alan Greenspan described as “irrational exuberance”.
One just had to look at the huge swings in the share price of listed chipmakers such as Nvidia or TSMC on the back of some news or other about the tech sector or how a report of a company delaying investment in an AI data centre could spark a market sell off.
Given the obvious fears that markets, in particular in the US, are now an AI bubble that could burst at any time, it is welcome that the Department of Finance has tried to model the impact of a market crash on the Irish economy.
The research forecasts that modified domestic demand (MDD) – seen as a more useful measure of the economy here than GDP – would be around 1.5 per cent lower than baseline after one year if the US stock market fell by 10 per cent. If the market dropped 20 per cent, MDD would be about 3.25 per cent below baseline. Employment would also drop, as would private consumption.
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This is helpful research and it does a lot to give us some idea of how vulnerable we are to the market tanking, but it only considers the impact from the market slumping. Clearly there would be a far wider hit beyond just that.
In fairness, the report’s authors make clear it does not consider the wider consequences of a crashing equity market. For example, it does not take into account possible contagion in credit markets – a notable omission considering how much debt AI firms are using to invest in data centres and other infrastructure.
It seems inevitable there would be wider fallout from a crashing market: it didn’t drop in isolation during 2008, for example. Some second and third-order effects will not really be predictable until they actually happen.
As the report says, “given the economy’s close integration with the US technology sector, such a correction would affect domestic demand, investment and the public finances”.
That is a polite way of putting it. Ireland will be directly in the firing line if the crash comes – and just how bad it will be won’t be clear until it actually happens.
