The latest national Business Confidence Monitor (BCM) for Q3 2024 shows a slight drop in sentiment. However, confidence remains high as businesses continue to expect sales and profits growth to improve significantly in the year ahead.
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 July to 20 September 2024.
- Sentiment in Energy, Water & Mining fell significantly in Q3 2024 and while it remained positive, the sector was among the least confident sectors in the UK economy.
- Domestic sales growth increased for the first time since Q1 2023 and further uplift is anticipated, but weakening exports growth is expected to deteriorate in the year ahead.
- Annual input price inflation slowed significantly from the previous quarter and further moderation is expected, but selling prices remained unchanged from Q2 2024 and profits declined. However, companies anticipate profits to return to growth next year.
- Following announced changes to the Energy Profits Levy, the tax burden became the most widespread challenge for the Energy, Water & Mining sector after a spike in citations from the previous quarter. Regulatory requirements remain a prevalent concern.
- Employment growth softened compared to Q2 2024 and a further slowdown is expected over the coming year.
- Capital investment spending growth increased but is expected to ease over the next 12 months, while R&D budget growth is also projected to drop significantly.
Business confidence in the Energy, Water & Mining sector
After rising in the two previous quarters, the Business Confidence Index for the Energy, Water & Mining sector plummeted in Q3 2024 to +4.4. This decline left sentiment below the sector’s historical average (+7.9) and significantly lower than the national average (+14.4), only above the Transport & Storage sector. While domestic sales picked up, it appears to have been a difficult quarter for companies within the sector for a variety of reasons. April’s 12% reduction in the OFGEM Energy Price Cap continued to keep household energy prices restricted to the lowest level since the conflict in Ukraine began, while wholesale gas and electricity prices climbed throughout the quarter, leading to a forthcoming 10% increase in the Energy Price Cap in October.
The new Labour government also made several announcements impacting the sector. In July, the government announced a significant amendment to the Energy Profits Levy, set up in May 2022 to tax the profits of oil and gas companies operating in the UK. From 1 November, the levy will be increased to 38% (previously 35%), bringing the headline rate of tax on upstream oil and gas activities to 75%. Perhaps more significantly, however, is the removal of the investment allowance that will reduce the extent to which capital allowance claims can be taken into account in calculating the levy on profits, further reducing future profit expansion. Meanwhile, the government has also introduced a series of restrictions surrounding the dumping of sewerage into the UK’s waterways, including increased monitoring and penalties and expanding protection for customers.
Domestic and export sales growth
Despite the drop in confidence, annual domestic sales growth within the Energy, Water & Mining sector picked up in Q3 2024, after slowing in each of the five previous quarters. The sector recorded growth of 4.5%, outperforming the 3.8% average rate recorded across all sectors. Looking ahead, businesses in the Energy, Water & Mining sector project a significant uplift in the coming year, with anticipated growth of 7.5%. This expected increase is nearly triple the sector’s historical average of 2.7% and higher than any other sector in the UK economy.
Simultaneously, companies in the Energy, Water & Mining sector reported that annual export growth declined for the second consecutive quarter in Q3 2024, dropping further below the historical average (2.9%) to 2.1%. Energy, Water & Mining companies expect further moderation in the year ahead, opposite to the trend anticipated in the majority of sectors. Businesses project the smallest exports increase in the UK, at just 1.4%, less than half the historical average.
Selling and input prices, and profits growth
Following an uptick in Q2 2024, the Energy, Water & Mining sector reported that input price inflation eased to 3.6% in Q3 2024, which was among the smallest cost increases of any sector in the UK economy. Only the Retail & Wholesale sector reported lower rises. However, input price growth remains above the sector’s historical average of 2.9%. Businesses in the sector expect that input cost inflation will soften significantly over the next 12 months, with a projected increase of just 0.8%, the lowest anticipated rise of any sector, and a third of the national average (2.4%).
Energy, Water & Mining companies maintained their selling prices at the same rate in Q3 2024 as reported in the previous quarter. This was the first time that businesses in the sector have held price levels across two quarters since Q3 2010, and the sector had the lowest prices rises of any in the UK economy. A key contributor to prices holding firm is likely the continued impact of April’s 12% reduction in the OFGEM Energy Price Cap, which dictates the prices energy businesses can charge. October’s forthcoming 10% rise in the cap will impact price changes over the coming 12 months, however, the anticipated rise of 1.5% reported this quarter is below the historical average (2.2%) for the sector and will be the lowest increase of any UK sector.
The pick-up in domestic sales growth was not enough to offset the squeeze on the sector’s profit margins from input cost inflation, increased salary growth and stagnant selling prices. As a result, companies in the Energy, Water & Mining sector reported a profits decline of 1.3% in the year to Q3 2024, the first decline since Q2 2021. Looking ahead, businesses in the sector project a return to growth over the coming year, with an anticipated expansion of 3.3%. While this increase is marginally above the 3.0% historical average sector, it is also the weakest expected rise in any sector, significantly below the 5.1% national average.
Business challenges
In the latest survey, concern over the tax burden spiked and became the most widespread issue for Energy, Water & Mining. In Q3 2024, 44% of businesses in the sector reported they encountered greater challenges with the tax burden, just shy of the historical high of 45% in Q1 2023. Part of this concern is likely linked to the upcoming changes to the Energy Profits Levy in November, with this concern more prevalent for Energy, Water & Mining companies than any other sector.
Regulations remain a prevalent concern for the Energy, Water & Mining sector. However, the proportion of companies in this sector citing regulatory requirements as a rising challenge fell from its historical high in the previous quarter, to 40% in Q3 2024 and was in line with the national average (40%).
Labour market
Annual employment growth in the Energy, Water & Mining sector slowed compared to the previous quarter, with an increase of 2.1%. Despite this decline in the rate of expansion, the sector recorded one of the strongest increases in the UK, only outpaced by the Business Services sector. However, businesses within the sector are expecting further moderation in the year ahead, with a projected rise of 0.9%, marginally below the historical average for the sector (1.2%) and the weakest in the UK economy.
After three consecutive quarters of decline, the Energy, Water & Mining company reported an uplift in wage growth in Q3 2024. The 4.5% increase was the highest of any sector in the UK and nearly double the historical average (2.4%). Businesses expect that the sluggish growth in staff levels will translate to a slowdown in salary growth over the next year to 2.2%, the weakest pay growth of UK sectors.
Investment
To keep up with the regulatory requirements in recent months, companies in the Energy, Water & Mining sector uplifted their capital investment at an increased rate compared to Q2 2024. The 4.2% growth was the strongest rise in the UK, significantly above the national average of 2.4%. However, over the next year, businesses within the sector plan to reduce the expansion rate to 2.1%. While this planned increase is above the UK average projection of 1.9%, it will be below the 2.9% historical average for the sector.
In Q3 2024, companies in Energy Water & Mining lifted R&D spending growth for the first time since Q3 2023. However, the 1.6% increase was marginally below both the historical (1.8%) and national (1.7%) averages. This pick-up in budget expansion will be short-lived as companies in the sector plan to reduce R&D budget growth to just 0.6% over the next 12 months, the lowest projected increase of any sector in the UK.
