Q1 2026: Confidence improves significantly in Q1 2026, though the Iran war poses a significant risk to sentiment.
The latest national Business Confidence Monitor (BCM) shows that business sentiment was on course to move into positive territory in Q1 2026, but the outbreak of the Iran war had a dramatic impact in the final weeks of the survey period, with confidence deteriorating sharply. While businesses reported improved annual domestic sales and exports growth and easing input price inflation compared with Q4 2025, the war introduced significant downside risks to the outlook for the coming year.
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 12 January to 16 March 2026.
- Confidence in Energy, Water & Mining climbed out of negative territory to +12.9 in Q1 2026 and remained significantly ahead of the national average (-1.1) and all other sectors.
- Domestic sales growth outperformed all sectors with a further uplift anticipated, while exports growth was comparatively modest and is expected to continue to slow.
- Annual input price inflation eased from the previous quarter and companies expect that price growth will continue at this pace next year and profits growth will improve.
- Regulations were the most widespread rising challenge for the sector, followed by concerns about energy costs.
- Capital investment growth was stronger than all other sectors in the year to Q1 2026, though companies plan to soften both capital investment and R&D budget growth next year.
Business confidence in the Energy, Water & Mining sector
After falling back into negative territory in the previous quarter, sentiment in the Energy, Water & Mining sector improved significantly in Q1 2026. The Business Confidence Index increased from -0.3 in Q4 2025 to +12.9, almost double the sector’s historical norm (+7.7). Businesses in the sector were also the most confident in the UK, significantly ahead of the national average (-1.1).
Stronger domestic sales and easing concerns over the tax burden lifted confidence, helped by the government’s decision to scrap charges linked to the Energy Company Obligation and to fund 75% of renewable energy projects through general taxation. These shifts coincided with a 6.7% rise in the Ofgem energy price cap in April, and in December the regulator approved £28bn in investment to upgrade electricity and gas grids nationwide, with the aim of reducing customer exposure to wholesale price volatility. However, the closure of the Strait of Hormuz in the final weeks of the survey poses a significant risk to confidence and recent spikes in oil and gas prices could erode sector margins under the current price cap.
Domestic and export sales growth
Energy, Water & Mining companies recorded stronger annual domestic sales growth than any other sector in Q1 2026. The reported 5% increase was nearly double the sector’s historical average (2.7%) and significantly ahead of the national average (3.5%). Over the next 12 months, businesses anticipate that domestic sales growth will accelerate further to 5.7%, marginally above the 5.4% rise projected across the UK.
Companies in the sector reported subdued exports growth of 2.1% in the year to Q1 2026, significantly lagging the 3.3% rise recorded nationally. Businesses predict export sales growth to moderate further to 1.4% over the coming year. This projected rise is half the sector’s historical average (2.8%) and around one-third of the national projection of 4.1%. However, increased uncertainty in the geopolitical environment following the outbreak of the Iran war poses risks to these expectations.
Labour market
Annual employment growth of 2.2% in Energy, Water & Mining was only behind Construction (2.6%) and double the national average (1.1%). Businesses plan to slow the rate at which they increase headcount in the year ahead to 1.2%, marginally below both the sector’s historical and national averages (both 1.3%).
Despite the uplift in employment growth in Q1 2026, a smaller proportion of businesses in the sector reported increased issues with skills availability. Of the companies surveyed, 13% cited the availability of non-management skills and 12% reported the availability of management skills, with both issues below their respective historical norms (18% and 14% respectively).
Alongside the rise in employment growth, Energy, Water & Mining companies reported an uplift in annual salary inflation compared to the previous quarter, rising to 3.4%. This increase surpassed the 3.2% rise recorded in the UK but businesses expect salaries to rise at a softer pace in the year ahead, projecting growth of 2.4%, matching the historical average and lower than the 2.9% increase anticipated nationally.
Selling and input prices, and profits growth
Annual input price inflation in the sector slowed for the second consecutive quarter in Q1 2026, dropping to 3.1%, markedly below the national average (3.6%) and only above the increases reported in Banking, Finance & Insurance. Companies predict that input price inflation will continue at the same pace over the next 12 months, still marginally above the sector’s historical norm (2.9%) and slightly ahead of the UK-wide projection of 3.0%.
Businesses reduced the rate at which they raised their selling prices to 1.3% in the year to Q1 2026, the softest uplift since Q4 2024 and again only stronger than the growth recorded among Banking, Finance & Insurance companies. At the time of the survey, businesses in Energy, Water & Mining planned on increasing the pace at which they raise their selling prices to 2.8% over the next 12 months, overtaking the sector norm and the national average projection (2.2%). However, these projections would have been largely established before the closure of the Strait of Hormuz with inflationary pressures likely to increase in the short term, and many companies expecting a sharp uplift in the energy price cap from July.
Sluggish exports growth and rising salary inflation likely affected profits growth among Energy, Water & Mining companies in the year to Q1 2026. The reported increase of 2.1% is significantly below both the sector’s historical norm (2.9%) and the national average (3.1%). With a marked uplift of 4.6% anticipated for the year ahead, the outlook is still lower than the 5.2% rise forecast nationally.
Business challenges
Concerns over the tax burden dissipated in Q1 2026 after the government announced it was ending funding for the Energy Company Obligation scheme and moving 75% of the costs of the Renewables Obligation to general taxation. Citations fell towards the sector’s historical average (20%) with 26% of companies reporting the tax burden as a rising challenge over the past 12 months, the lowest proportion since Q3 2023 and half the UK average (53%). Regulatory requirements remain the most prevalent issue among companies in the Energy, Water & Mining sector after the Employment Rights Bill achieved Royal Assent in December. Of the businesses surveyed, 53% cited regulations as a growing challenge in Q1 2026, markedly above the sector’s historical norm (42%) and the national average (47%).
Perhaps somewhat unsurprisingly, energy costs were a widespread concern among companies in the Energy, Water & Mining sector, with 43% of companies citing the issue in Q1 2026. This was the first time businesses were asked about energy costs as a rising challenge and the issue was more prominent in this sector than most other sectors, exceeding the national average of 35%.
Investment
At 4.7%, the Energy, Water & Mining sector reported higher annual capital investment growth than any other sector in the year to Q1 2026. However, companies expect to slow capital expenditure growth over the coming year to 2.6% and, while this is stronger than almost all other sectors, it is lower than the sector’s historical average (3.0%) and may reflect business uncertainty about future UK energy policy.
Annual R&D budget growth slowed to 1.5% in the year to Q1 2026, lagging both the national average (2.1%) and the sector historical norm (1.8%). Companies plan to curb R&D budget growth to 0.8% over the next 12 months, a weaker forecast than the UK average (1.4%), with only businesses in Property and Construction sectors anticipating slower growth.