15 September 2026: An AI ‘slowdown’ would add to economic fragility

A slowdown in AI development would weaken the UK’s already fragile growth outlook, mainly by reducing future productivity gains, increasing exposure to foreign AI supply shocks, and slowing labour‑market restructuring. The UK is unusually dependent on AI to lift long‑term productivity, so that a deceleration would matter more here than in many peer economies.

The most recent GDP data showed that the economy is becoming increasingly reliant on the new technology, as foreign businesses have eroded its traditional manufacturing base and the UK cannot compete on price. However, the rising quality of foreign-made goods means the UK also cannot compete on reliability.

There is no doubt the government will be concerned about warnings from AI businesses about the dangers of this technology's rapid expansion, but will also be acutely aware that it needs to regulate it to ensure safety.

AI is one of the few credible drivers of future UK productivity growth. IMF analysis shows that AI has unusually high potential in the UK because of its large, high-skill, knowledge-intensive services sector, where AI adoption yields the greatest efficiency gains.

If AI development slows, TFP growth will remain weak, and the UK’s long-term productivity slowdown will continue. GDP growth will remain stuck near 1% rather than rising towards the 1.5–2% range that AI could unlock. Automation and process-efficiency gains will arrive later, delaying cost reductions for firms.

The IMF’s model shows that regulatory and skills improvements can increase AI-driven output gains by two-thirds; a slowdown would remove those gains entirely.

AI is a major driver of UK investment. Already, £1.6bn is committed to AI research and infrastructure through 2030. Microsoft alone has pledged £30bn in investment over the next three years.

A slowdown would reduce private-sector investment in digital infrastructure and data-driven services, lower demand for complementary technologies (cloud, cybersecurity, advanced chips), and slow the development of new AI-enabled business models in finance, legal services, health, and logistics.

This matters because UK business investment is already structurally weak.

The co-creator of Anthropic, the company at the centre of concerns over the rapid pace of AI development, told the BBC yesterday that, because so few developers are in the field, there is a narrow window to introduce regulation and slow development to ensure AI remains safe as it grows.

Anthropic reported that its own platform managed to create an ‘underground’ network that allowed it to ‘talk’ to other platforms, completely unhindered by ‘human involvement’.

Fresh attacks in the Middle East have pushed oil prices higher this morning, raising the prospect of rate hikes as the Bank of England prepares to meet this week.

Brent crude is trading 3.3% higher at around $108 a barrel, after surging 8.6% to close last week at $104.61.

Rising energy prices 'pose a serious headache' for the Bank of England, which meets this week, economists warn.

Oil rose sharply overnight after new strikes on Saudi Arabian and Iranian ships in the Gulf, as well as the shutdown of Saudi Arabia's East-West oil pipeline.

The closure of the route, which helps Saudi Arabia avoid the Strait of Hormuz and redirect its exports, threatens up to 4% of the world's oil supply.

The development suggests the conflict is, once again, moving further from resolution as the impact of higher oil prices starts to be felt.

Chris Beauchamp, chief market analyst at IG, commented: 'Oil markets are being subjected to their worst fears all at once – attacks on energy infrastructure, the closure of Hormuz and a breakdown in attempts to restart negotiations.'

Alongside geopolitical events, domestic issues will also give MPC members food for thought. The August employment data and the latest inflation figures will be released within the next 36 hours, giving the Bank up-to-date figures for its deliberations.

Yesterday, GBP/USD drifted lower to around $1.35, while GBP/EUR held near €1.1660, reflecting a quiet session driven more by anticipation of upcoming UK data than by any major market catalyst.

Has there ever been a U.S. President more self-serving than Donald Trump?

His latest criticism, amid fears about AI safety, is clear: to ensure the United States keeps rushing headlong into adopting a technology few understand and even fewer can control.

President Trump downplayed concerns that AI could go rogue after several tech leaders called for putting the brakes on its development.

Speaking to reporters at his Doonbeg golf resort in Ireland, the President said the dire warnings about AI were exaggerated and that “negative forces” were claiming things that won’t happen.

“We’re leading China in AI, we’re the most sophisticated country in the world, and frankly, I want to keep it that way because whoever wins AI, wins,” Trump said. “And we can put guardrails; we can do this and that. But I think you have a lot of negative forces that are bringing it up that shouldn’t be bringing it up.”

Trump did not explain what he meant by “negative forces.”

His latest post on his social media channel expressed his views explicitly: “The only control or “guardrails” that AI needs is a STRONG AND SMART (High IQ!) PRESIDENT, and the U.S.A. has that, in spades!” Trump wrote. “We already have tremendous CRIMINAL and REGULATORY power over these companies!”

An intensifying selloff in Treasuries pushed the US 10-year yield above 5% for the first time since 2023, as mounting inflation concerns collided with rising government and corporate borrowing needs.

The yield rose by as much as four basis points to 5.01% yesterday. It last breached 5% in October 2023, and then only for one day.

The rise in the 10-year yield, a benchmark borrowing cost for global government and corporate debt as well as US mortgages, threatens to slow economic growth and weigh on equities trading at lofty valuations. Yields have continued to rise despite Treasury Secretary Scott Bessent's unusual move to boost buybacks of longer-dated bonds as the Trump administration seeks to keep borrowing costs in check.

A rate hike this week would put Fed Chairman Kevin Warsh directly at odds with Trump’s demands for lower borrowing costs, especially with elections weeks away. Markets expect the FOMC to tighten tomorrow, as inflation remains too high, but doing so would defy Trump’s public pressure and could trigger a political backlash.

Trump has repeatedly insisted that the U.S. should have “the lowest interest rates anywhere in the world”, despite high deficits and $40 trillion in federal debt. He has blamed other Fed officials for blocking cuts and warned he will punish trade partners if rates are not lowered. A Warsh-led hike would therefore undercut Trump’s narrative that rates should fall, increase borrowing costs heading into the midterms, and spotlight Trump’s culpability for the rise in inflation, due in part to his tariff regime.

Yesterday, the dollar appreciated as EUR/USD fell to 1.1551 and multiple major currencies weakened. The move reflected firm Treasury yields and ongoing inflation concerns.

As the Eurozone faces a subdued growth outlook, a different economic picture has emerged along its southern flank: Spain, Portugal, Italy and Greece, all deeply affected by Europe's sovereign debt crisis over a decade ago, have shown renewed vitality and resilience in recent years.

In the second quarter of 2026, seasonally adjusted GDP in the Eurozone increased by 1.0% YOY. By contrast, Spain, Portugal and Greece recorded growth of 2.7%, 2.5% and 1.9%, respectively, while Italy matched the Eurozone rate.

A report published in June by Allianz, the global insurance company, described Southern Europe's post- 2021 performance as "a clear shift in the geography of Eurozone growth, with Southern economies moving from chronic underperformance to cyclical leadership."

Analysts and market observers attribute this resilience to three overlapping shifts: a broader mix of growth drivers, financial and institutional repair reinforced by EU investment, and a pragmatic openness to external markets, capital and technology, including expanding industrial partnerships with China.

Together, these factors have helped Southern Europe withstand some of the pressures weighing on the Eurozone's traditional industrial core.

Recent shocks, from supply-chain disruptions to energy-price spikes and trade tensions, have not affected the Eurozone evenly.

"In the current cycle, the asymmetry of external shocks has, so to speak, shifted sides," Pablo Sanz, a professor at Spain's National University of Distance Education, said in an interview.

Sanz said Southern Europe's service-heavy economies and growing use of renewable energy had made them less vulnerable to some energy and trade shocks.

The difference is also visible in the drivers of growth. In the second quarter of 2026, Spain's Economy Ministry reported that domestic demand, investment and industry supported growth, while Portugal's rebound was driven mainly by net external demand.

Investment, construction and services have supported Italy in recent years, while investment, consumption and net exports all contributed to Greece's growth in 2025. Tourism also remains an important source of activity, employment and services exports, particularly in Spain, Portugal and Greece.

Italian Prime Minister Giorgia Meloni said in a weekend interview with Il Foglio that Italy's economy could grow by 1% in 2026, matching or slightly exceeding the Eurozone average, a marked improvement on her government's April forecast of 0.6% and the parliamentary budget office UPB's estimate of 0.9%.

She noted that first-half GDP data were solid. Meloni acknowledged that high energy costs and weak productivity have long hampered Italy, and that reforms will take time to bear fruit. Italy's economy grew by just 0.5% in 2025, and growth has not exceeded 1% in any of the past three years, despite billions of euros in EU recovery funds.

Ongoing low water levels on the Rhine have significantly reduced shipping capacity, causing substantial economic losses for Germany, according to spokesperson Nicole Rabold of the Chamber of Commerce in Rhineland-Palatinate.

The extent of this year's losses remains uncertain, particularly compared with the 2.4 billion Euros lost in 2018 under similar conditions. Because the Rhine handles about 80% of Germany's inland freight transport, it is a crucial artery for industrial logistics.

This year, Germany has experienced multiple heatwaves, leading to persistently low water levels that have severely hampered shipping operations, with some vessels unable to navigate at all and others forced to travel with reduced loads.

An electoral survey Ipsos carried out for Le Monde and published on Sunday is a warning sign for candidates in the 2027 French presidential election. The country is experiencing a profound desire for change and a clear wish to turn the page on Emmanuel Macron's two terms.

Three-quarters of those polled said they believe the country's situation will worsen in the coming months, almost 30% higher than five years ago. This underlying trend can be explained largely by the state of the French economy, which is threatened by recession and the rising cost of living, as shown in an economic report by the National Institute of Statistics and Economic Studies (INSEE) last week.

Yesterday, the Euro fell against the US dollar and the pound, was mixed against European peers, and showed broad but mild weakness across global FX markets. This was a USD‑driven session, not a euro‑specific shock.

Have a great day!