The latest Business Confidence Monitor (BCM) shows business confidence falling further across the UK as difficult economic conditions combine with political turmoil. The latter has seriously unsettled financial markets, and although some stability has been restored, recent events are likely to result in higher interest rates, taxes and government borrowing, and lower government spending, than previously expected. This has adversely affected business sentiment.
The survey results are based on telephone interviews among ICAEW Chartered Accountants that took place between 25 July and 14 October 2022.
- The Business Confidence Index has fallen markedly from the highs of mid-2021 and is now back in negative territory.
- Domestic sales growth remains healthy, but is easing, and companies expect a further weakening over the next year as the economy slows.
- Business confidence is clearly also being damaged by supply shortages and near-record increases in input prices, as wholesale oil and energy costs continue to rise amid the Ukraine-Russia war. Some parts of the sector are also likely to be concerned about the possibility of windfall taxes.
- In response to increasing cost pressures, selling prices are rising sharply in the sector. For energy companies selling directly to consumers, this is clearly linked to the record price cap increases by OFGEM. In the coming months, the Energy Price Guarantee will limit price cap increases.
- Steep increases in selling prices help to explain why late payments are a more widespread problem in Energy, Water & Mining than any other sector. Transport problems also remain elevated.
- Ongoing challenges relating to the availability of non-management skills and staff turnover are also probably impacting sentiment. Because of these pressures, salary growth remains well above historical norms.
- As has been the case over recent years, businesses continue to increase capital investment at a faster pace than in most other sectors. This is underpinned by the sector’s ongoing need to adopt new green technologies and transition to more renewable sources of energy.
Business confidence in the Energy, Water & Mining sector
The Business Confidence Index for Energy, Water & Mining has plunged back into negative territory in Q4 2022. At -11.9, this is the weakest the index has been in the sector since Q4 2020, when the UK was still in the middle of the coronavirus pandemic. Sales growth is still healthy in the sector, although businesses are contending with a range of challenges that are clearly hampering company sentiment. Issues surrounding the availability of labour and transport problems remain prominent. As well as this, annual input price inflation is almost at a record high for the sector, driven by the surge in wholesale oil and gas prices due to the Ukraine-Russia war.
As cost pressures have intensified, significant public attention has been placed on the increases in selling prices by energy businesses. The selling price caps enforced by the Office of Gas and Electricity Markets (OFGEM) for UK consumers were raised by a record pace of 54% in April. This price cap was originally due to rise by a further 80% in October, but that caused widespread concern about its impact on consumers, and the government announced its Energy Price Guarantee, a scheme that has limited the October price cap increase to 27%.
These issues have also been unfolding against a backdrop of structural change in the sector. The government’s target of net-zero emissions by 2050 means that businesses in Energy, Water & Mining are under growing pressure to adopt more efficient, greener technologies that will help them to lower their carbon footprints, by moving towards renewable sources of energy. There is also an ongoing need to replace existing capacity within some sub-sectors, with high initial costs potentially involved, but in a wider market that is facing major global uncertainties.
Domestic sales growth
Through the pandemic, businesses in Energy, Water & Mining suffered sharp falls in domestic sales as commercial and industrial energy use declined. Since then, annual domestic sales growth has recovered strongly, with a record increase achieved in the year to Q3 2022. The pace of growth in Q4 2022 remains healthy (6.4%) but is slower than the previous quarter. And companies anticipate a moderation of domestic sales growth in the year to Q4 2023 to 4.0%. The impact of high inflation on the purchasing power of customers, and the broader slowdown in the economy, are likely to be the main factors behind this outlook.
Selling and input prices, and profits growth
The fall in the Business Confidence Index from the heights of 2021 is related to the strong input cost increases that companies are facing. Ongoing supply-side disruptions due to the Ukraine-Russia war largely explain why annual input price inflation is now running at 6.6%. Only in Q4 2005 did the sector experience a sharper rise. And businesses clearly do not expect these cost pressures to ease over the coming 12 months. Input prices are expected to be a further 5.7% higher by Q4 2023, with only companies in Manufacturing & Engineering and Construction expecting larger cost increases for the 12 months ahead.
These rises in input costs have put significant financial pressure on some parts of the sector, partly because of how tightly OFGEM is controlling consumer selling prices. Indeed, in early 2022 a number of key energy suppliers required government support. In response to higher costs, OFGEM sharply lifted the selling price cap in April. An even steeper rise was planned for October 2022, but the government has since announced the Energy Price Guarantee which will limit consumer price rises over the winter months.
For the sector as a whole, selling prices charged to customers increased by 3.8%, year-on-year, in Q4 2022, a rate that is comfortably above the historical average for the sector. And another 4.3% increase in selling prices is expected over the next year, outpacing all other sectors with the exception of Manufacturing & Engineering.
Despite higher selling prices, profits growth is easing within the sector. Growth of 5.3% compares unfavourably with the previous quarter, and businesses expect a much more modest outturn of 2.3%, trailing the UK’s outlook.
These near-record rises in selling prices help to explain why late payments are a more widespread challenge in Energy, Water & Mining than in any other sector. In Q4 2022, 29% of businesses cite this as a growing challenge, well above the UK average of 20%. The labour market has also been an area of difficulty for the sector. Two of the most widespread challenges in Energy, Water & Mining continue to be the availability of non-management skills and staff turnover: 29% of companies cite the former, while 31% are being increasingly challenged by the latter. Both are higher than the historical averages for the sector.
The percentage of businesses dealing with growing transport problems (19%) also remains well above historical norms. Brexit may be part of the explanation for this, with new controls and regulations on the movement of raw materials possibly causing disruptions to the delivery networks of some companies. There may also be some continuing impact from driver shortages.
Challenges related to the availability and recruitment of workers help to explain why average total salaries are rising by 3.1% in Q4 2022, a markedly faster pace than the sector’s historical average. A marginally sharper 3.4% rise is planned for the year ahead. Businesses also intend to increase their staffing levels by 3.1% over the next year, following growth of 3.0% in Q4 2022. These plans may further amplify the difficult recruitment conditions that businesses are facing, as well as adding to wage bills.
On a more encouraging note, capital investment growth has remained strong in the sector. This has been a trend of the past few years, with businesses continuing to increase spending sharply. The year to Q4 2022 saw expenditure on capital assets rise by 5.2%, comfortably outpacing all other sectors. Capital investment rates are also expected to outperform growth across all other sectors except for Transport & Storage over the coming 12 months, although at a significantly reduced rate of 2.0%.
The continued strength of capital investment growth partly stems from the sector being very capital-intensive and needing ongoing investment in order to replace and expand generation plants and distribution networks. The move towards renewable energy sources also means that companies need to engage in significant additional investment if they are to respond to changing patterns of customer demand and meet government targets.