It seems like they're either encrypting communication between each server or between each data center: the article is very vague. Either way, your data is still unencrypted inside a server (which is obvious: you can't search through your mail without knowing the plaintext.)

I assume you mean encrypting data at rest since this development takes care of all in transit encryption, well, because of ads, analytics, other predictive data intensive services like "Google Now" etc.

You can still encrypt data at rest (on spinning or flash memory) and use it for jobs like these. It's just decrypted while in RAM for use.