Sometimes you should be careful what you wish for. As the American midterm elections results rolled in we can be certain that everyone in the Labour Government was hoping Donald Trump’s Republican Party would get thumped. They were no doubt toasting a string of victories for his opponents, and relishing the embarrassment of his allies in this country.
But they had probably not counted on the stock market rout that has followed the humbling of the president at the polls. If that turns into a wider collapse, Britain is going to be hit as hard as any other country – and it will torpedo Andy Burnham’s administration just as it was getting started.
We will soon find out whether we have simply witnessed a correction, followed by a swift bounce-back, or whether this is the start of a deep bear market. Even so, huge sums of money were lost as the tech stocks suffered their worst trading day since 2020, and dragged down the wider market. The Nasdaq fell by more than 6pc on Thursday, with major companies including Nvidia and SpaceX falling by close to 10pc in a single day. That quickly spread to Asia, with South Korea’s Kospi index down by 6pc overnight, and by Friday morning Britain’s FTSE 100 was getting hammered as well, along with all the main European bourses.
The reason is simple. Investors reckon the scale of Trump’s defeat means the artificial intelligence boom is in deep trouble. Democratic senators, Congressmen and governors are going to block the rollout of the data centres on which the industry depends, while tech bosses who had positioned themselves as close to the president, will face an inevitable backlash, and possibly stricter regulation.
After the midterm elections, tech bosses who had positioned themselves as close to Donald Trump face a backlash, and possibly stricter regulation – Getty Images/Kevin Dietsch
Of course you can argue that tech was massively overvalued, and more than overdue a correction, and there is an element of truth in that. Even so, once the market starts to fall, it acquires a momentum of its own. And it will make it a lot harder for the AI pioneers to raise the vast sums of capital they need over the next few months, and without that fresh money not all of them will necessarily survive.
If the rout continues, that is going to make the next few months very difficult for the Government of Andy Burnham. Paradoxically, it may bring some short-term relief.
The flight from equities means bonds will rally, and the Chancellor won’t be facing such crippling interest bills every month. The Bank of England might decide to postpone the next rise in interest rates, and that will mean mortgage rates won’t go up so quickly. And yet no one should be fooled by that. The economic outlook could turn grim very quickly. There are three reasons for that.
To start with, it will hammer investment. Against a generally dismal backdrop, AI has been one of the few bright spots in the British economy. As the Bank of England noted in the minutes of the latest Monetary Policy Committee meeting released this week, “Novel AI-related activity accounts for just under a fifth of GDP growth since the start of 2026.”
Mainly because we have slightly looser rules than the European Union, and despite our crippling power costs, a slice of that American AI money has been landing in Britain. If that dries up, what do we think is going to replace it? Retail? Pubs and hospitality? Construction?
Most of these other major sectors are in free-fall, and with debt costs soaring, even the public sector can’t keep expanding in the way it did after Rachel Reeves ramped up borrowing. In short, one of the few growth sectors will be destroyed, and nothing will replace it.
Next, the shift into safe-haven bonds will be short-lived. There is one thing we know for sure about any kind of market crash. Once a collapse starts, every kind of risk asset gets caught up in the chaos. Sooner or later, the bonds of wildly over-indebted countries will come under attack as well. Specifically, that means Britain and France. We already have the highest borrowing rates in the developed world, and France has the highest rates in the eurozone.
Investors will want gold, Swiss francs, and probably Treasury bills as well. But they won’t want gilts issued by a government that has lost control of spending. The Chancellor is already paying £120bn a year in debt interest, and in a Budget two weeks ago that may soon look hopelessly inadequate, he reduced his fiscal headroom to a mere £15bn, almost half the level he inherited. As gilt yields soar, it will be very hard to make the books balance.
Finally, Britain is, just as it was in 2008, uniquely exposed to the financial markets. There are always different channels, but Britain remains as dependent on the finance industry as it has been for the last few decades. It could be one of the major banks, one of the hedge funds, or one of the new players in the private credit market, itself an accident that has been waiting to happen all year.
But in a general market crash, even if it starts in the United States, something will blow up. It may well be in London instead of New York, and, if it is, we will have to pick up the pieces.
The Burnham administration has sold itself on “hope”, on controlling the cost of living and on making life more affordable. There is nothing wrong with any of those objectives. But so far it has done nothing to insulate the economy from economic shocks, or to bring down inflation significantly.
Indeed, the Bank already expects it to rise to 5pc by early next year, and that was with stable markets. We will see if this is just a correction or a genuine bear market in the next few days. But if it turns into a widespread collapse the UK will be in big trouble – and so will the Prime Minister and his Chancellor.