Every few decades, we see a moment of technological and financial euphoria that reshapes the world. Railways, the internet, housing, and now artificial intelligence (AI).

So, are we in an AI bubble? The truth is: it’s not a bubble until it pops. AI is dominating headlines, investment portfolios, and dinner table conversations. But while markets might get ahead of themselves, history tells us that such moments often lay the groundwork for lasting progress.

Lessons from past revolutions

If history is any guide, the AI era looks a lot like the rise of the internet during the dot-com boom. Extraordinary investment is fuelling rapid advances in computing power, data infrastructure, and automation. These are the building blocks of future productivity.

Even if we do see a correction, it’s likely to be a temporary stumble on a much longer upward journey, just as the railway and internet booms left behind valuable legacies that powered decades of growth.

What happens if markets drop?

If there’s a correction, I believe it will affect New Zealand in a few key ways.

1. The impact on investments

New Zealanders are more exposed to global markets than ever, thanks largely to KiwiSaver funds. A sharp market drop could make investors feel poorer, but the long-term picture is still encouraging.

KiwiSaver balances have grown by 336% in the last decade; however about two-thirds of that growth has come from regular contributions, not investment returns. The lesson? “Time in the market” matters far more than trying to “time the market”.

For anyone close to retirement or buying a first home, being in the right fund for your risk tolerance is key. It’s about matching your timeline, not reacting to short-term swings in the market. There’s also a new generation of investors on platforms like Hatch and Sharesies who haven’t yet lived through a major downturn. The hope is they’ll stick with investing, rather than stepping away for decades - as many did after New Zealand’s 1987 crash.

2. The broader financial system

Unlike the Global Financial Crisis, an AI-related market correction would not likely threaten the global banking system. This isn’t about bad debt or collapsing credit markets. It’s about reassessing lofty expectations for tech companies.

So while portfolios might take a temporary hit, the underlying financial plumbing should hold up just fine.

3. How governments and central banks might respond

If growth slows sharply, central banks could step in with rate cuts. In New Zealand, the Official Cash Rate (OCR) is currently 2.25%, leaving only limited room to move before cuts become less effective. Fiscal policy, meaning government spending and borrowing, could also cushion the blow, though our books are already stretched. We borrowed heavily for the Canterbury earthquakes, COVID-19, and recent tax cuts, all while running structural deficits.

The bigger long-term challenge is demographic: fewer working-age Kiwis supporting more retirees. Today, we have around four workers per retiree, but that’s projected to drop to two within the next 50 years. Future governments will have less room to “borrow and spend” their way through the next major crises.

How to prepare for whatever comes next

If the AI boom does deflate, there’s no need to panic. Instead, focus on what you CAN control. Ask yourself:

• Am I with a KiwiSaver provider whose values align with mine?
• Am I in the right fund for my goals and risk tolerance?
• Am I contributing regularly and taking full advantage of employer and government contributions?
• Do I have an emergency fund or “fun savings” buffer for peace of mind?

These are the basics of financial resilience, and they matter far more than trying to predict when (or if) the bubble will burst.

Because whether AI keeps soaring or stumbles along the way, one thing is certain: progress doesn’t move in a straight line, but it rarely stops.

This is Simplicity Research Hub’s independent expert commentary and thought leadership on economic trends and policies of interest to all New Zealanders. This content is our opinions and is provided for general information only. It does not relate to your particular financial situation or goals and is not financial advice or recommendations. Any external resources provided are accessed at your own risk and the Simplicity Research Hub takes no responsibility for third party content and does not approve, recommend, or endorse any external websites or the content they contain.