Sentiment during the quarter was on course to return to positive territory for the first time since Q4 2024 amid better-than anticipated economic conditions, which supported domestic sales and lift profits growth to a two-year high.

But confidence tracked by ICAEW’s Business Confidence Monitor (BCM) plunged from +7.3 at the end of August to -0.5 at the end of the 10-week survey period in September, as renewed US-Iran hostilities – responsible for driving up oil and gas prices – weakened overall sentiment.

Despite improving significantly from a reading of -14.6 in Q2, confidence has been in negative territory (more businesses pessimistic than optimistic) for seven successive quarters, the joint-longest period on record alongside the 2008 global financial crisis.

Geopolitical risks remained the biggest challenge to business performance, amid continued tensions in the Middle East, affecting three in five (58%) firms. Labour costs (53%) were the second biggest challenge, followed by regulation (47%), energy costs (45%) and the tax burden (41%).

Firms remain cautious about the outlook for the year ahead with expectations of growth in domestic sales, profits and turnover in all slowing in Q3, the report found.

Businesses back innovation to combat rising costs

R&D activity grew at its fastest rate since Q3 as firms stepped up investment in productivity improvements and efficiency gains, likely supported by greater adoption of AI and other technologies.

Separate ICAEW research found that in response to rising business costs since the start of the year, more firms sought productivity and efficiency improvements (63%) than raising prices (54%) or mothballing expansion plans (25%)

By sector, R&D growth was strongest in IT and communications (4.0%), the fastest growth since Q1 2023, followed by financial services (3.5%), where R&D expanded quicker than at any point since Q4 2013.

Alan Vallance, ICAEW Chief Executive, said:

"The warning bells will be ringing for the Prime Minister and Chancellor ahead of the Budget, with sentiment stuck in a rut as the resilience of Britain’s businesses continues to be tested by geopolitical events.

“While there is much the government can’t control, the Budget presents an important opportunity to turn ambition into action. Businesses have been burdened by rising costs, higher taxes, regulatory change and persistent uncertainty for far too long.

"Business rates reform is key to unlocking growth. A one-year freeze in the multiplier would provide immediate relief, while a commitment to longer-term reform would boost confidence and investment.”

Suren Thiru, ICAEW Chief Economist, said:

“The third quarter was characterised by a sharp shift from confidence to caution, with the renewed US-Iran hostilities in September extinguishing early optimism by reigniting fears over rising costs and weaker economic prospects.

“Cooling price and pay indicators point to inflationary pressures remaining under control, with firms still struggling to pass higher costs onto customers, making case for a November rate rise more difficult to justify.

“Though stronger R&D spending could boost productivity, it is as much about survival as success, with firms investing in innovation to strengthen resilience amid growing headwinds, while recruitment takes a back seat.

“Weakening indicators of future sales, profits and turnover point to a challenging end to the year, with surging energy costs and rising inflation increasingly squeezing growth and leaving the Chancellor facing a tougher Budget balancing act.”

Inflation pressures remain in check

Selling price inflation dipped in Q3 from 2.5% to 2.2%, above the historic norm, though expectations for the next 12 months also eased slightly. By sector, the prices charged to customers by energy, water and mining firms are expected to rise most in the year ahead.

Input prices rose faster (3.9%) than selling prices (2.2%), an indication that firms are struggling to pass on higher costs to customers.

Salary growth has also moderated, with average total salaries increasing by 2.8%, the lowest level since Q1 2022 and down from 3.1% in Q2. Expected salary growth also appears softer than earlier in the year, the survey found.

Jobs growth drops to five-year low

Employment growth slowed to 0.7% in Q3, the lowest rate since Q2 2021 and down from 1.4% in Q2. ICAEW said this was likely a response to elevated labour costs and increased automation.

While expectations for employment growth in the year ahead are muted (1.5%), employment growth is expected to be strongest within energy, water and mining (2.8%) and weakest in retail and wholesale (0.3%).

Stark differences in confidence across sectors

The survey also found significant differences in confidence across the economy. Confidence was highest among businesses in IT and communications (+14.5) and energy, water and mining (+11.4), and most negative among those in property (-14.4) and construction (-8.2).

ENDS

Notes to editors:

To restore business confidence and boost investment, ICAEW has also recommended the following practical measures at the Autumn Budget:

• One-year freeze in the business rates multiplier for 2027/28
• Rule out further increases in employment taxes during this parliament
• Clarify the definition of “current budget balance” in the fiscal stability rule ahead of the Budget to help avoid market surprises
• Fix tax administration by prioritising investment within HMRC to improve performance
• Expand the Growth Guarantee Scheme to help SMEs invest.

The full BCM report is available on request.

As one of the largest and most comprehensive quarterly surveys of UK business activity, BCM is closely watched and referenced by key policymakers, including HM Treasury, the Bank of England (including being referenced in their Monetary Policy Report), and the British Business Bank.

1. The Business Confidence Monitor (BCM) began in 2004.
2. 1,000 Chartered Accountants based in the UK responded to a telephone survey between 13 July and 21 September 2026. Businesses were categorised in terms of size (number of employees), region and industry sector. Regional classification used was ONS Government Office Regions.

Business Confidence Index methodology - The Business Confidence Index is calculated from the responses to the following:

“Overall, how would you describe your confidence in the economic prospects facing your business over the next 12 months, compared to the previous 12 months?”

A score was applied to each response as shown below, and an average score calculated:

Using this method, a Confidence Index of +100 would indicate that all survey respondents were much more confident about future prospects, while -100 would indicate that all survey respondents were much less confident about future prospects.