‘Lingering’ inflation warning as UK secures major economic upgrade
The UK remains at risk from “lingering” inflation but its economy is among nations showing “robust” growth, according to a biannual report which upgrades its expectations for output both this year and next.
The Organisation for Economic Co-operation and Development (OECD) saw UK gross domestic product (GDP) rising by 1.1% this year – faster than the euro area combined.
That compared to a figure of just 0.4% it had forecast for 2024 back in May.
It marked one of the biggest upgrades to forecasts among the Paris-based club’s 38 member states.
Its predictions, the OECD cautioned, continued to be at the mercy of world events following a succession of shocks in recent years from COVID, Russia’s invasion of Ukraine and the conflict in the Middle East.
The UK upgrade largely reflected the better-than-expected performance seen during the first six months of the year when the country exited the recession of the second half of 2023.
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The downturn was widely blamed by economists on the impact of Bank of England interest rate hikes to bring down inflation.
In its update, the OECD said a high pace of wage growth, while moderating, remained a threat to the UK inflation outlook.
It also pointed to continued pressure from services price inflation.
The findings chimed with recent commentary from the Bank of England that it would take a cautious approach to further interest rate cuts, following the shift to 5% from 5.25% seen in August.
The OECD suggested UK growth would accelerate mildly to 1.2% during 2025 – a timeframe ahead that is currently shrouded in mystery as the new Labour government is yet to outline its first budget, due on 30 October.
Chancellor Rachel Reeves has promised a focus on bolstering growth.
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She said of the report’s findings: “Faster economic growth figures are welcomed, but I know there is more to do and that is why economic growth is the number one mission of this government.
“Next month’s budget will be about fixing the foundations, so we can deliver on the promise of change and rebuild Britain.”
The OECD forecasts showed a further downgrade for Europe’s largest economy, Germany, which was seen as growing by only 0.1% this year.
Its anticipated performance, largely a consequence of an uncompetitive manufacturing base during a time of slowdown in China, has proved a drag on the wider euro area’s GDP forecast.
That stood at an unrevised 0.7%.
The European Central Bank is expected to act twice more this year to cut borrowing costs in a bid to bolster flagging activity.
Its US counterpart cut its target range for the first time since 2020 last week amid worries over a hiring downturn.
The OECD said it still expected US GDP growth to slow to a rate of 2.6% this year – cushioned by further monetary policy easing as inflation came under control.
The report predicts: “Significant risks remain. Persisting geopolitical and trade tensions could increasingly damage investment and raise import prices.
“Growth could slow more sharply than expected as labour markets cool, and deviations from the expected smooth disinflation path could trigger disruptions in financial markets.
“On the upside, the recovery in real incomes could provide a stronger boost to consumer confidence and spending, and further oil price declines would hasten disinflation.”
It added: “Decisive fiscal actions are needed to ensure debt sustainability, preserve room for governments to react to future shocks and generate resources to help meet future spending pressures. Stronger efforts to contain spending and enhance revenues, set within credible medium-term adjustment paths, are key to ensuring that debt burdens stabilise.”
If you ever fly to Washington DC, look out of the window as you land at Dulles Airport – and you might snatch a glimpse of the single biggest story in economics right now.
There below you, you will see scattered around the fields and woods of the local area a set of vast warehouses that might to the untrained eye look like supermarkets or distribution centres. But no: these are in fact data centres – the biggest concentration of data centres anywhere in the world.
For this area surrounding Dulles Airport has more of these buildings, housing computer servers that do the calculations to train and run artificial intelligence (AI), than anywhere else. And since AI accounts for the vast majority of economic growth in the US so far this year, that makes this place an enormous deal.
Down at ground level you can see the hallmarks as you drive around what is known as “data centre alley”. There are enormous power lines everywhere – a reminder that running these plants is an incredibly energy-intensive task.
This tiny area alone, Loudoun County, consumes roughly 4.9 gigawatts of power – more than the entire consumption of Denmark. That number has already tripled in the past six years, and is due to be catapulted ever higher in the coming years.
Inside ‘data centre alley’
We know as much because we have gained rare access into the heart of “data centre alley”, into two sites run by Digital Realty, one of the biggest datacentre companies in the world. It runs servers that power nearly all the major AI and cloud services in the world. If you send a request to one of those models or search engines there’s a good chance you’ve unknowingly used their machines yourself.
Inside a site run by Digital Realty
Their Digital Dulles site, under construction right now, is due to consume up to a gigawatt in power all told, with six substations to help provide that power. Indeed, it consumes about the same amount of power as a large nuclear power plant.
Walking through the site, a series of large warehouses, some already equipped with rows and rows of backup generators, there to ensure the silicon chips whirring away inside never lose power, is a striking experience – a reminder of the physical underpinnings of the AI age. For all that this technology feels weightless, it has enormous physical demands. It entails the construction of these massive concrete buildings, each of which needs enormous amounts of power and water to keep the servers cool.
Sky’s Ed Conway at the data centre
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We were given access inside one of the company’s existing server centres – behind multiple security cordons into rooms only accessible with fingerprint identification. And there we saw the infrastructure necessary to keep those AI chips running. We saw an Nvidia DGX H100 running away, in a server rack capable of sucking in more power than a small village. We saw the cooling pipes running in and out of the building, as well as the ones which feed coolant into the GPUs (graphic processing units) themselves.
Such things underline that to the extent that AI has brainpower, it is provided not out of thin air, but via very physical amenities and infrastructure. And the availability of that infrastructure is one of the main limiting factors for this economic boom in the coming years.
According to economist Jason Furman, once you subtract AI and related technologies, the US economy barely grew at all in the first half of this year. So much is riding on this. But there are some who question whether the US is going to be able to construct power plants quickly enough to fuel this boom.
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For years, American power consumption remained more or less flat. That has changed rapidly in the past couple of years. Now, AI companies have made grand promises about future computing power, but that depends on being able to plug those chips into the grid.
Last week the International Monetary Fund’s chief economist, Pierre-Olivier Gourinchas, warned AI could indeed be a financial bubble.
He said: “There are echoes in the current tech investment surge of the dot-com boom of the late 1990s. It was the internet then… it is AI now. We’re seeing surging valuations, booming investment and strong consumption on the back of solid capital gains. The risk is that with stronger investment and consumption, a tighter monetary policy will be needed to contain price pressures. This is what happened in the late 1990s.”
‘The terrifying thing is…’
For those inside the AI world, this also feels like uncharted territory.
Helen Toner, executive director of Georgetown’s Center for Security and Emerging Technology, and formerly on the OpenAI board, said: “The terrifying thing is: no one knows how much further AI is going to go, and no one really knows how much economic growth is going to come out of it.
“The trends have certainly been that the AI systems we are developing get more and more sophisticated over time, and I don’t see signs of that stopping. I think they’ll keep getting more advanced. But the question of how much productivity growth will that create? How will that compare to the absolutely gobsmacking investments that are being made today?”
Whether it’s a new industrial revolution or a bubble – or both – there’s no denying AI is a massive economic story with massive implications.
For energy. For materials. For jobs. We just don’t know how massive yet.
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