The latest national Business Confidence Monitor (BCM) for Q4 2023 shows a slight shift in sentiment within the quarter. However, the quarter-on-quarter improvement in sentiment is marginal, remaining broadly steady at a similar level over the last few quarters. Overall confidence continues to fall short of the pre-pandemic 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 17 October to 15 December 2023.
- The Business Confidence Index for the Energy, Water & Mining sector fell into negative territory for the first time since Q4 2022.
- Domestic sales growth eased for the third consecutive quarter, and businesses anticipate a similar rate of growth in the year ahead.
- Input price inflation in the Energy, Water & Mining sector softened in recent quarters, but remains high by historical standards. Companies expect the pace to moderate further in the next 12 months, though it is among the higher rates predicted across all sectors.
- Energy, Water & Mining saw some of the biggest declines in annual selling price inflation compared to Q3 2023, with the current rate slower than any other sector. Businesses expect the rate to pick up but remain below the UK average.
- Regulatory requirements remained the most widely cited growing challenge but have fallen in recent quarters. Financial issues have become more commonly reported and the tax burden and access to capital are prominent concerns.
- Employment growth has picked up and is faster than in any other sector, but the rate of expansion is expected to slow in the year ahead.
- Capital investment spending growth is faster in Energy, Water & Mining than any other sector, and companies are also lifting R&D budgets. A similar pace of growth is expected over the year ahead for both measures.
Business confidence in the Energy, Water & Mining sector
Sentiment in the Energy, Water & Mining sector fell for the second consecutive quarter, and the Business Confidence Index has now slipped into negative territory for the first time since Q4 2022. Having dropped from +9.6 in the previous quarter to -2.8 in Q4 2023, companies in the sector are among the least optimistic about prospects over the next 12 months, with only Business Services having a lower score.
The Israel-Gaza war initially caused oil and gas price rises and, although these have since abated, uncertainty around energy prices has increased. And attacks on container ships in the Red Sea have again highlighted the fragility of international supply chains, which could also filter through to broader inflationary pressures. Combined with broader challenges, including above-target inflation and high interest rates, these factors are likely damaging business confidence in the Energy, Water & Mining sector.
It is perhaps unsurprising that sentiment in the Energy, Water and Mining sector has fallen, given company expectations that profits growth in the year ahead will slip below those seen in the last year. However, the BCM survey offers evidence of other factors weighing on confidence in the sector, including a rise in the proportion of companies reporting government support as a growing challenge, and a general upward trend over several quarters for those citing access to capital.
Domestic sales growth
Domestic sales increased in the Energy, Water & Mining sector in the year to Q4 2023 but, with annual growth of 4.5%, the rate has eased for its third consecutive quarter, reversing the upward trend largely seen since late 2020. That said, the pace of increase is still ahead of the sector's historical norm of 2.7%, and favourable compared to the UK average (3.6%). Energy, Water & Mining companies anticipate a similar domestic sales growth rate in the coming year (4.9%), matching the predicted rate for the UK.
Selling and input prices, and profits growth
Input prices continue to rise in the Energy, Water & Mining sector, however, the rate has softened for the third quarter in a row. While this suggests input price inflation is likely to have passed its peak, input costs are 5.3% higher in Q4 2023 than a year ago, only somewhat below the record rate achieved in Q1 2023 (6.9%). Businesses anticipate the rate to moderate further in the coming year to 3.6%, though this prediction is higher than expected in most sectors. The outlook has significant risks, mainly those stemming from events in the Middle East, which could impact global energy supplies and prices.
Compared to the previous quarter, Energy, Water & Mining companies saw among the biggest declines in annual selling price inflation in Q4 2023 and, at 1.6%, it is slower than any other sector in the UK. But in the year ahead, businesses in the sector anticipate the rate to rise, reaching 2.3%. This would move selling price inflation closer to the historical growth for the sector (2.2%), but would lag the predicted rate for the UK average (2.6%).
With a slowdown in selling price inflation and input costs remaining elevated, it is unsurprising that profits growth in the sector continues to ease. Profits in the sector are now 4% higher in Q4 2023 than a year prior, and businesses forecast profits growth to moderate further in the coming 12 months, to 3.7%, which is slightly ahead of the sector’s historical norm (3.1%). Still, it is slower than the predicted rate of all sectors bar Property.
Business challenges
Financial challenges are increasingly widespread for Energy, Water & Mining companies. The most notable is the tax burden, cited by more than one in three businesses as a growing challenge in the sector. Although concerns over access to capital has remained broadly stable since the previous quarter, it too has been trending upwards for several quarters, and in Q4 2023 it was flagged by 27% of companies in the sector. Indeed, the tax burden and access to capital are more prevalent issues in Energy, Water & Mining than any other sector, apart from Property. There is also a rise in the proportion of companies reporting government support as a growing challenge, and at 17%, it is more widespread than any other sector and somewhat ahead of the historical norm for the sector (12%). Transport problems had dissipated after the challenges experienced through 2020 and 2021 but nudged up to 21% in Q4 2023 from 14% in the previous quarter.
Labour market concerns relating to the availability of skills and staff turnover remain prominent, cited by around one in five Energy, Water & Mining companies. That said, these have been easing over recent quarters and are hovering around the sector's historical norms.
However, the sector's most widespread growing challenge remains regulatory requirements, which 35% of businesses reported in Q4 2023, following declines in the last two quarters.
Labour market
Annual employment growth in the Energy, Water & Mining sector picked up in Q4 2023, having eased considerably in the previous quarter. At 3.6% year-on-year in Q4 2023, it is three times the pace of the sector’s historical norm and faster than any other sector in the UK. Businesses in the sector plan to raise staff levels by 2.8% in the coming year; while this is slower than the last 12 months, it is ahead of all other sectors, bar IT & Communications (2.9%).
Linked to the above, salaries in the sector are also rising and, at 4.6% in the year to Q4 2023, are running at twice the historical average. Indeed, the pace of salary growth is joint-fastest with Construction and Transport & Storage. Companies expect salary growth to ease marginally over the next 12 months to 4.3%, but this is the highest rate predicted across all sectors. This likely reflects issues with the availability of skills and general inflationary pressures.
Investment
Growth in capital investment spending is faster in Energy, Water & Mining than in any other sector, likely driven by the sector's capital-intensive nature and businesses transitioning to renewable energy. But at 3.5% year-on-year in Q4 2023, it continues to trend down. That said, it is notably above the sector’s historical average (2.9%) and businesses anticipate a similar pace of growth in the coming year. Investment by Energy, Water & Mining businesses is expected to be more favourable than in any other sector but lower than seen in the past two years.
R&D spending in Energy, Water & Mining is healthy by historical standards for the sector, with growth running at 2.4% in the year to Q4 2023. As with capital investment spending, businesses in the sector expect to continue to raise R&D budgets at a similar pace to the last 12 months.
