Q4: Sentiment declined further in Q4 2024 but is now slightly stronger than the UK average.
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 14 October to 13 December 2024.
- Confidence in Energy, Water & Mining fell further in Q4 2024 and while it remained positive, sentiment stayed below the sector’s historical average but marginally ahead of the UK.
- Companies reported marked declines in both domestic sales and exports growth in Q4 2024, however, businesses expect to outpace the growth projected nationally over the next year.
- Input price inflation continued to ease in the year to Q4 2024. At the same time, profits growth improved, despite businesses marginally reducing their selling prices.
- Regulatory requirements were the most widespread issue but citations about the tax burden also spiked following the Autumn Budget and changes to the Energy Profits Levy.
- Employment growth increased compared to the previous quarter and while a modest slowdown is expected over the coming year, companies plan the strongest uplift of any sector.
- Businesses expect to increase capital investment and R&D budgets at a faster rate than any other sector over the next year.
Business confidence in the Energy, Water & Mining sector
Sentiment in the Energy, Water & Mining sector declined for the second quarter in a row in Q4 2024. The Business Confidence Index dropped from +4.4 in Q3 2024, to +1.7 in the latest quarter, contracting further below the sector’s historical average (+7.9). However, even with this fall, the sector was marginally above the national average (+0.2).
Marked declines in domestic sales and exports growth are likely key contributors to this drop in confidence. Meanwhile, the uplift in the Energy Profits Levy from 35% to 38%, which increased the headline rate of tax on upstream oil and gas activities to 75% from 1 November, alongside the proposed tax increases announced in the Autumn Budget have led to tax concerns among businesses in the sector reaching a survey high. However, October’s 10% increase in the OFGEM Energy Price Cap seems to have helped Energy companies to record profits growth in the year to Q4 2024, following a contraction in the previous quarter. The Autumn Budget also set out a series of strategic investment funding to support the transition towards net zero which appears to have boosted investment and R&D budgets in the sector.
Domestic and export sales growth
After increasing in the previous quarter, annual domestic sales growth slowed significantly to 1.6% in Q4 2024. This increase was the softest rise since Q2 2021 and was half the pace of the national average (3.2%), lagging most sectors. Over the coming year, companies in the Energy, Water & Mining sector expect growth to improve significantly, to nearly double the historical average (2.7%), to 5.3%. However, while this increase will marginally outpace the national average of 4.9%, it is still a downgrade on the 7.5% growth projected last quarter.
At the same time, businesses in the Energy, Water & Mining sector reported that exports growth dropped to 0.2%, the lowest since Q1 2021 and the softest expansion of any sector in the year to Q4 2024. However, companies anticipate growth will increase significantly in the year ahead to 5.5%, with businesses expecting to outperform most other sectors. This will be nearly double the sector’s historical average growth rate (2.9%).
Labour market
After slowing in the previous two quarters, annual employment growth in the Energy, Water & Mining sector spiked in Q4 2024, to 4.1%. This increase was the fastest growth reported by businesses in the sector since Q3 2006 and outpaced all other sectors in the UK economy. While companies plan to moderate the rate at which they expand their staffing levels slightly in the year ahead to 3.7%, their expectation is the highest forecast of any sector, and almost triple the sector’s historical employment growth (1.3%).
As employment levels in the sector rose, some of the challenges associated with hiring also increased compared to the previous quarter. The proportion of companies reporting the availability of non-management skills as a rising challenge increased from 12% in Q3 2024, to 22%. This proportion was above the sector’s historical average (18%) and was only more prevalent in the Construction sector (27%). However, at the same time, the share of companies citing the availability of management skills continued to decline, dropping to 6%, less than half the sector’s historical average (14%) and lower than all other sectors.
Despite the uptick in employment growth, Energy, Water & Mining companies reported that salary inflation eased compared to the previous quarter, dropping to 3.2%. Despite this slowdown, wages growth within the sector remains above the historical average (2.4%). Businesses expect a further modest slowdown over the coming year, projecting growth of 2.9%, slightly above the 2.7% rise expected nationally.
Selling and input prices, and profits growth
Input price inflation eased for the second consecutive quarter, dropping from 3.6% to 2.6% in Q4 2024. This moderation brought cost growth below the historical average (2.9%) and was the smallest rise of any sector in the UK. Businesses in the Energy, Water & Mining sector anticipate this trend will continue over the coming year, easing further to 2.2%, significantly below the national average of 2.7%.
October’s increase in the OFGEM Energy Price Cap was not enough to offset the drop in selling prices seen following April’s 12% price cap reduction. Partly as a result, Energy, Water & Mining companies reported a 0.2% decline in selling prices in the year to Q4 2024 and was the only sector to report a reduction in selling prices over the year. January’s 1.2% increase in the Energy Price Cap will give some companies in the sector some additional scope to increase their prices over the next 12 months, with the sector overall anticipating selling prices to rise by 1.7%. However, this uplift is below the sector’s historical average (2.2%) and is weaker than expected in most other sectors.
Despite somewhat mediocre sales growth and declining selling prices, Energy, Water & Mining companies reported an uplift in profits growth to 1.8% in Q4 2024, having contracted by 1.3% in Q3 2024. However, even with this improved growth, the sector was still among the weakest in the UK, significantly lagging behind the 3.3% average observed across the UK economy. Companies in the sector are optimistic about the year ahead and expect profits to rise by 5.1%, above the historical average (3.0%) and in line with the projected national average (5.0%).
Business challenges
The latest survey results show that businesses in the Energy, Water & Mining sector were increasingly concerned about regulation in Q4 2024. The proportion of companies citing regulatory requirements as a rising challenge rose above the sector’s historical average (42%), to 51%, as the government published stronger legislation aimed at cleaning the UK’s waterways and reaffirmed its position on the transition to net zero. Regulation was only a more prominent growing challenge to businesses in the Banking, Finance & Insurance sector (58%).
At the same time, citations of the tax burden climbed to a survey record high in Q4 2024, with 49% of companies in the sector reporting they faced greater challenges with the issue. This heightened concern is likely linked to both the tax increases announced in the Autumn Budget and November’s increase in the Energy Profits Levy, with concern about the tax burden more prevalent for Energy, Water & Mining companies than any other sector.
Investment
Companies in the Energy, Water & Mining sector marginally eased the rate they increased their capital investment compared to Q3 2024. However, at 3.8%, the sector saw significantly higher investment growth compared to both the national average (2.6%) and the sector norm (3.0%). Businesses in the sector plan to uplift capital expenditure over the next year, partly in response to meeting increased regulation, and the projected expansion of 4.1% is significantly higher than expected across all other sectors in the economy.
Similarly, Energy, Water & Mining businesses raised R&D budgets at a sharper rate than any other sector in the year to Q4 2024, with a 3.0% increase. This growth was above both the historical (1.8%) and national average (1.6%). Companies plan to maintain this rate of expansion over the next 12 months, and their expectations for R&D budget growth are the highest of all sectors.