Data centre gold rush

Data centre gold rush

 

Data centres are massive warehouses full of computers and networking equipment used to run digital services, from movie streaming to online banking. Currently, there is a data centre construction “gold rush” underway, accelerated by the emergence of artificial intelligence (AI). This has increased the need for processing power as well as the electricity required to run everything.

US tech giants such as Google and Microsoft, together with major US investment firms, are currently building new data centres in the UK. Ninety new sites are planned to meet rising demand from AI and cloud services. The number of datacentres is projected to increase by over 20% by around 2030, with the majority located in the South-East. Many UK engineering companies are seeing major growth opportunities in data centres, from electrical cabling to liquid-based cooling technology, the ‘picks and shovels’ of the gold rush!

The UK is believed to be the third-largest nation for data centres, behind the US and Germany. However, if it is to maintain this leading position, the UK will need to address its high energy costs, limited water resources and lengthy planning process to prevent operators and private investors from considering building elsewhere. At least the government has joined the data centre gold rush, overturning some local councils’ rejection of planning permissions, citing the importance of data centres to the UK’s infrastructure and its economic growth ambitions. Data centres have even been designated critical national infrastructure.

The domestic technology sector is estimated to employ over 1.7 million people and contributes over £100bn to the UK economy. Expanding the number of data centres in the UK is crucial for supporting the country’s digital economy, although the rapid rate of growth poses significant energy and environmental challenges.

While many new data centres use air-cooling methods, water is still required – a potential challenge given summer droughts. New reservoirs are being planned across England to improve water security, but these will take several years to build. Many of the new data centres will also be serviced by troubled Thames Water! In parts of the US, data centres have pushed up energy bills. We all want ever faster data services, but will UK consumers accept potentially higher utility bills due to data centre energy demand?

What have we been watching?

Hopes of a Ukraine peace deal, but which seem to be dashed by Russia.

The S&P500 hit a fresh all-time high, despite a midweek sell-off in US tech stocks. Concerns, once again, about the levels of investment in AI and worries about the eventual returns. The independence of the US Federal Reserve (Fed) being called into question, once again, as Trump posted that Fed Governor ‘Cook, must resign, now!’ Lisa Cook responded, saying that she ‘had no intention of being bullied to step down’ from her position.

European stocks were better, helped by hopes of a potential Ukrainian peace deal. This rally included the UK’s leading quoted companies which hit another new all-time high despite higher-than- expected inflation data.

Yesterday in France, Prime Minister Bayrou called a confidence vote. Seeking to force support for his budget plan that foresees EUR 44bn of fiscal tightening. Unfortunately for Bayrou, the vote is expected to fail, with officials from the far-left, far-right, and Socialist MPs saying they would vote

against it. If lost, Macron could nominate a new Prime Minister to pass the 2026 budget or call snap elections. The polls suggest another fragmented outcome, raising investor attention on whether it could secure a majority this time.

If defeated, Macron could appoint a new PM or call snap elections. Polls show a fragmented outcome, though far-right RN leads, keeping investors alert.

Russia has said it will only agree to security guarantees for Ukraine that give Moscow an effective veto over any effort to defend Kyiv, pouring cold water on Trump’s efforts for a peace deal. The comments by Foreign Minister Sergei Lavrov would also appear to cast doubt on whether Putin would attend a summit with President Zelensky. In the meantime, Russian is also continuing to undertake drone, and missile strikes on Ukrainian cities.

Trump tariffs continued to overshadow markets. In the latest move, Trump has widened the 50% tariff (25% for the UK) on steel and aluminium to include more than 400 consumer goods that include these materials from motorbikes to car parts.

On Friday, Fed Chair Jerome Powell signalled the road to rate cuts in Jackson Hole speech. A rising “downside risks to employment” and a “shifting balance of risks” that could prompt policy adjustments. This suggests that less labour market weakening may now be needed to inspire further rate cuts. The market seems to be betting that the growth hit from tariffs will dominate the inflation pickup in future decisions around interest rates.

Last night Trump claimed “sufficient cause” to dismiss Fed Governor Cook, citing 2021 mortgage-related allegations, and moved to remove her immediately; she challenged the move. If upheld, it could shift the Fed Board toward a majority more likely to favour interest rate cuts. Markets now price an 83% chance of a September Fed rate cut (up from 71% pre-speech).

UK inflation was slightly stronger than expected in July at 3.8% – an 18-month high. However, this appeared to be driven by the volatile transport and travel services components. Services inflation remains ‘sticky’ at 5%. Food inflation appears to be gaining momentum one again. Droughts in Spain, Italy and Portugal, where the UK sources much of its fresh fruit and vegetables, have pushed up prices this summer. At a time when prices would usually fall. UK weather is also affecting farmers. The Bank of England expects inflation to peak at 4% in September, before edging back.

 

UK ‘flash’ PMI composite business activity indicator for August was better than expected at 53.0. Within this manufacturing was weaker at 47.3, but the service sector expended to 53.6.

 

The Eurozone ‘flash’ PMI composite business activity indicator for August was slightly better than expected at 51.5. Within this, manufacturing moved into expansion with a reading of 50.5 while service sector activity was steady at 50.1

 

The US ‘flash’ PMI business activity indicator for August showed manufacturing at 53.3 while service sector activity was batter than expected at 55.4.

 

Markets continue to look for evidence of the impact from Trump tariffs. Japanese exports recorded a big fall in July, with sales to the US down by over 10%.  Meanwhile, the ‘flash’ composite PMI business activity indicator for August was steady at 51.9 with manufacturing at 49.9 and the service sector at 52.7.

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Brent oil was steady around $67 as traders continued to monitor developments in Gaza and Ukraine.

Finally, the Chief Executive of Rolls Royce estimates that the world will need 400 Small Modular Reactors (SMRs) by 2050. Given each one is estimated to cost up to $3bn that’s a potential trillion dollar-plus market up for grabs. Clearly the SMR technology still needs to be proven as there is not currently a working SMR, but Rolls Royce sounds confident and intends to dominate this market. Besides three SMRs planned for the UK, it is currently working on six for the Czech Republic.

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