The latest national Business Confidence Monitor (BCM) for Q1 2024 shows a significant improvement in sentiment compared to weak yet positive confidence in the previous quarter and the average for 2023. The index rose above its pre-pandemic average for the first time since Q1 2022, as economic prospects brightened.
The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 15 January to 22 March 2024.
- The Business Confidence Index for the Energy, Water & Mining sector climbed out of negative territory in Q1 2024, but sentiment remains fragile.
- Domestic sales growth softened for the fourth quarter and companies expect this trend to continue over the next 12 months. Export sales are projected to accelerate.
- Energy, Water & Mining recorded the lowest input price inflation of any sector in the last 12 months and companies predict further moderation in the coming year.
- Companies within the sector also saw the smallest selling price growth of any UK sector, but it is the only sector expecting to raise prices at a faster rate in the coming year.
- Regulatory requirements continued to be the most widely cited growing challenge for companies within the sector, with a notable increase compared to the previous quarter.
- Employment growth remained strong and was faster than any other sector in the year to Q1 2024, however, businesses expect growth to moderate in the year ahead.
- Capital investment spending in Energy, Water & Mining increased at a much higher rate than the national average in the past year and is expected to remain strong next year. R&D budgets will continue to rise at a similar rate in the coming year.
Business confidence in the Energy, Water & Mining sector
After slipping into negative territory in the previous quarter, the Business Confidence Index for Energy, Water & Mining improved to reach +6.7 in Q1 2024. Despite this improvement, sentiment remained below the sector’s historical average (+7.7) and the national average (+14.4). Companies in the sector are among the most pessimistic about prospects over the coming year, with only IT & Communications having a lower score. The announcement from OFGEM on 23 February, that the Energy Price Cap will reduce the typical household bill by approximately 12% to the lowest level since the conflict in Ukraine began, may be linked to this relative lack of optimism.
In addition, the Chancellor also announced an extension to the windfall tax on oil and gas profits as part of the Spring Budget in early March 2024, which may also be contributing to weak sentiment in the Energy, Water & Mining sector. The 35% Energy Profits Levy, originally announced in May 2022 in response to record profits for the oil and gas industry, will now run for an extra year, ending in 2029 rather than March 2028.
Domestic and export sales growth
Businesses in the Energy, Water & Mining sector reported that domestic sales growth softened for the fourth quarter in a row in Q1 2024, to 4.1%. However, this remained ahead of the national increase (3.3%). Looking ahead, Energy, Water & Mining is only one of two sectors that expect domestic sales growth will decline further over the coming year, with a modest slowdown in the rate of expansion to 3.9% in the coming 12 months. While this growth rate will remain above the historical average for the sector (2.7%), it will be among the weakest performances of any sector, only outpacing Manufacturing & Engineering, and significantly behind the UK average of 5.2%.
Meanwhile, exports growth, which had also been on a declining trend in the previous quarter, ticked up and was reported at 2.9% for the year to Q1 2024, in line with the historical average and outperforming most sectors. The outlook is better still, with companies anticipating growth of 5.9%, matching the leading growth expectation for the IT & Communications sector.
Selling and input prices, and profits growth
The Energy, Water & Mining sector recorded the sharpest slowdown in input price inflation in Q1 2024, with prices up just 3.1% from the previous year. This increase in input costs is only marginally above the sector’s historical average of 2.9%, suggesting a return to normality is close for the sector. Indeed, that is the view of companies within the sector; they anticipate input cost inflation to fall below its historical average in the next 12 months, with an expected growth of 2.6%. However, there are a number of risks to this outlook, most notably the escalation of events in the Middle East which could provoke volatility in global energy supplies and prices.
The easing of the sector’s input cost pressures is mirrored in selling prices. Energy, Water & Mining recorded the smallest rise in prices charged to customers of any sector in the year to Q1 2024, up just 1.4%. This was also notably below the sector’s historical average of 2.2% and the lowest rate of growth since Q2 2021. Despite a reduction in the energy price cap from April 2024, Energy, Water & Mining is the only sector expecting to increase selling prices at a faster rate than last year, with prices forecast to climb by 2.4%. However, this is still marginally behind the predicted national rate (2.6%) and broadly in line with the historical average for the sector (2.2%).
The increase in selling prices was lower than the increase in input prices over the past year and it is therefore not surprising that profits growth continued to deteriorate in the 12 months to Q1 2024, rising by just 0.8%. This was significantly below the national average (2.4%) and ahead of only the Construction sector. Businesses are more optimistic about the year ahead, however, with an anticipated increase of 4.4%, outpacing the 3.1% historical average for the sector but still lagging the expected national growth rate of 5.1%.
Business challenges
After declining throughout 2023, there was a significant increase in the proportion of businesses citing regulatory requirements as a growing challenge in Q1 2024, with 55% of companies reporting them as an increasing concern, close to the sector’s historical high. The Energy, Water & Mining sector is highly regulated so it is not surprising that this would be the most widespread growing challenge for businesses within the sector. The reduction of the Energy Price Cap alongside the continued push toward Net Zero could be contributing factors in this uplift.
Financial challenges continue to be prominent across the Energy, Water & Mining sector. Access to capital (29%) and government support (16%) were more prevalent growing challenges for companies within Energy, Water & Mining than any other sector and have been on a broadly rising trend in recent quarters. Issues with the tax burden (27%) is second only to the Construction sector as a prominent concern, perhaps reflecting the extension of the windfall tax levied on oil and gas companies. Labour market concerns relating to staff turnover remain prominent and were also more widespread in this sector compared to anywhere else, with 30% of businesses citing it as a growing challenge.
Labour market
Annual employment expansion remained strong in Q1 2024, with the Energy, Water & Mining sector recording growth of 3.5%, the sharpest rise of any UK sector. Future increases to staffing levels are expected to be more moderate and in line with the national average (2.2%). Businesses within the sector expect to increase their staff levels by 2.3% over the next 12 months, still nearly double the historical average (1.2%).
Salary growth softened slightly to 4.2% in Q1 2024 but remains strong compared to most other sectors. This growth was still considerably higher than the sector’s historical norm of 2.3%. Companies expect salary growth will experience a notable moderation to 3.1% in the coming year as inflationary pressures dissipate, with only the Banking, Finance & Insurance sector anticipating slower growth.
Investment
The capital-intensive nature of the Energy, Water & Mining sector as well as the transition to Net Zero has likely underpinned comparatively strong capital investment growth in the sector over the past 12 months, with only Manufacturing & Engineering outpacing the 3.3% growth recorded in the sector. Energy, Water & Mining is one of only two sectors expecting to see an acceleration in capital investment growth in the coming year. The 4.0% projected expansion is the sharpest increase planned across all sectors and will push the sector further ahead of its historical average rate of 2.9%.
R&D spending eased for the second successive quarter in Q1 2024 but growth of 1.9% recorded over the year was broadly in line with both the national average (2.0%) and historical norm for the sector (1.8%). Companies in the Energy, Water & Mining sector expect R&D budgets to continue to expand at a similar rate over the next 12 months.
