The latest national Business Confidence Monitor (BCM) for Q2 2024 shows a sustained increase in confidence and is now at its highest level for two years, as businesses expect falling input price inflation to support further growth in demand and improved profits 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 April to 22 June 2024.
- Sentiment in Energy, Water & Mining improved in Q2 2024, with confidence now above the UK average and most sectors in the UK economy.
- Confidence is supported by expected uplifts in domestic sales and exports in the year ahead after sales growth softened in Q2 2024.
- Energy, Water & Mining businesses also recorded the highest input price inflation of any sector in the past year but one of the lowest selling price increases, squeezing profits growth. However, companies project very strong profits growth next year.
- Meanwhile, regulatory requirements were the most widespread challenge cited by businesses, matching the historical survey high.
- Employment growth slowed from the previous quarter and further moderation is expected over the coming year amid elevated wages growth and evidence of skills shortages.
- Capital investment spending growth has been easing but is expected to improve next year, while R&D budgets will also continue to rise but at a slower rate.
Business confidence in the Energy, Water & Mining sector
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After climbing out of negative territory in the previous quarter, sentiment in the Energy, Water & Mining sector rose significantly in Q2 2024. The Business Confidence Index reached +23.6, three times the sector’s historical average (+7.9) and only behind Banking, Finance & Insurance (+25.4). Sentiment in the sector is at its highest point since Q4 2021. This optimism is supported by strong export and profit growth expectations and comes despite the reduction in the OFGEM energy price cap in April and the recent uplift in wholesale gas and electricity prices which have impacted both input and selling price inflation. However, the sector is heavily regulated and business concern about regulatory requirements matched the historical survey high point in the latest quarter. Companies will be hopeful that the change in government might address some of their growing concerns.
Domestic and export sales growth
Despite the lift in sentiment, annual domestic sales growth in Energy, Water & Mining slowed for the fifth consecutive quarter. The sector’s 2.2% increase was below the 2.7% historical average for the sector and was also among the weakest in the UK, with only Manufacturing & Engineering (1.5%) reporting smaller growth. ONS data show that recent output growth in the sector has been mixed with growth in the energy sector in the three months to April 2024, but output declined in water and mining. While businesses expect sales growth will more than double in the next year to 4.8%, this increase is lower than the projected national growth rate of 5.3%.
Export growth also eased from the previous quarter, falling below the historical average (2.9%) to 2.6% in Q2 2024. This expansion was also outpaced by the 3.0% seen nationally. However, businesses expect strong growth of 5.9% over the next year, outpacing all other sectors in the UK economy and nearly doubling the historical average.
Selling and input prices, and profits growth
The Energy, Water & Mining sector recorded a spike in input price inflation in Q2 2024, as wholesale gas and electricity prices climbed compared to the previous quarter. The 4.9% growth was the sharpest increase of any UK sector, outpacing the UK average of 4.4%. Businesses expect price growth will moderate over the next year, with a projected increase of 3.5%. However, this increase will still be above the historical average (2.9%) and will still be the largest rise in the UK.
Selling price inflation also picked up compared to the previous quarter in Q2 2024, climbing above the historical average (2.2%), with growth of 2.6%. Despite this uplift, the sector recorded one of the lowest price increases in the UK, below the national average of 3.2%. Despite April’s reduction in the OFGEM energy price cap, Energy, Water & Mining companies are planning to increase prices at a marginally faster rate of 2.8%, outpacing almost all other sectors.
The sharp increase in input prices has resulted in profit growth softening further in Q2 2024, easing for the fifth consecutive quarter to just 0.4%. This expansion was the weakest of any UK region and was significantly outpaced by the 3.1% national average. However, companies in the sector are expecting sharp profit growth in the next 12 months, with a projected expansion of 6.6%. This rise will be over double the historical average (3.1%) and will outpace the UK average of 5.5%. Only IT & Communications companies are projecting a sharper rise, but there are significant downside risks to this outlook; continued volatility in the Middle East may cause significant fluctuations in global energy supplies and prices.
Business challenges
The proportion of companies in the Energy, Water & Mining sector citing regulatory requirements as a rising challenge continued to increase in Q2 2024, equaling the historical high at 61%. This was also the highest proportion of companies citing this issue of any sector and much larger than the national average of 43%. The Energy Price Cap, the transition toward Net Zero and the increased pressure to clean up the UK’s waterways are likely exacerbating the challenges faced by companies in the already highly regulated sector.
Customer demand remains a prevalent challenge for businesses in Energy, Water & Mining, with the proportion of companies citing the issue remaining at 31% in Q2 2024. This rate matched the historical average but is lower than most other industries.
Financial challenges remain prevalent concerns for the Energy, Water & Mining sector. Issues with the tax burden (29%), access to capital (24%), and government support (16%) were prominent rising issues for companies within Energy, Water & Mining, with the latter two challenges more prominent in Energy, Water & Mining than in any other sector.
Labour market
Despite a modest slowdown from the previous quarter, employment growth in the Energy, Water & Mining sector outpaced almost all other sectors in the UK economy in Q2 2024, with a 2.7% expansion. Businesses expect further moderation in employment growth to 2.2%, however this projection is above expectations for both the historical (1.2%) and national averages (1.9%).
Like most sectors, businesses reported growing recruitment challenges in the wake of the pandemic, with the availability of management and non-management skills rising significantly in 2021 and remaining elevated into 2023. These concerns have abated somewhat but the proportion of companies reporting skills issues, particularly the availability of management skills, climbed in Q2 2024 and sits above the historical averages. Staff turnover is also a more prominent challenge for the sector than nationally, reported by 27% of businesses. ONS data shows that the vacancy rate for mining and energy firms is above the average with 14,000 vacancies across Energy, Mining and Water in March-May 2024.
High recruitment demand and potential labour supply shortages in the sector means that salaries are still increasing rapidly. While wage growth continued its downward trajectory in Q2 2024, the 4.0% expansion was the joint-highest in the UK. Now that CPI inflation has returned to the 2% target, companies expect salary growth will also soften over the next 12 months, with a 3.4% rise anticipated next year. However, this forecast is notably higher than the historical average (2.4%) for the sector, and marginally ahead of the expected national average (3.2%).
Investment
Capital investment growth slowed for the fourth consecutive quarter in Q2 2024, however the 2.9% expansion remained above the UK average of 2.3%. Increasing regulatory pressure and the transition to cleaner energy and water supplies is expected to lead to an uplift in investment growth over the next year to 3.4%.
Companies in Energy Water & Mining eased R&D spending growth for the third consecutive quarter in Q2 2024, to 1.5%, dropping below both the national average (1.9%) and the historical norm for the sector (1.8%). Businesses expect to curb R&D budget growth further with planned rises of 1.2% in the year ahead.
