Businesses in the East Midlands were the most pessimistic, the report found, with confidence plummeting from -11.4 to -22.3 on ICAEW’s Business Confidence Monitor (BCM) index, as the region’s greater dependence on production and logistics left companies more exposed to the volatile global trading environment.

Meanwhile, companies in Scotland (2.1 in Q1 to –21.1 in Q2) and the North West (9.9 in Q1 to –14.3 in Q2) recorded the largest drops in confidence. In Scotland, the Iran War and subsequent closure of the Strait of Hormuz pushed up energy and oil prices, leading to a steeper fall in confidence than the UK-wide decline.

In Wales, confidence fell sharply but domestic sales growth is expected to strengthen in the next 12 months. Labour costs were widely cited as a challenge by Welsh firms.

Only Yorkshire and the Humber recorded a positive confidence reading (2.1) with sentiment now negative in every other nation and region surveyed. Projected increases in domestic sales and exports likely shielded the region from the conflict, the Institute said, though these expectations being realised will hinge on the future US-Iran relations

With the conflict in the Middle East ongoing during the survey period, geopolitical risks were the most-cited challenge to business performance in most parts of the country. They were most prominent in the West Midlands (71%), reflecting the region’s heavy exposure to manufacturing and exports, followed by London (68%) and South East (67%).

Following the closure of the Strait of Hormuz, energy costs were highly reported as a problem area of businesses, particularly in the East Midlands (68%), reflecting its energy-intensive manufacturing and transport sectors.

Of the other challenges, firms in the North East (70%) and Yorkshire and the Humber (66%) said labour costs were a growing challenge, while late payments – at a five-year high nationally – were cited by nearly a third of firms (28%) in Yorkshire and the Humber.

Kim Johnston, ICAEW Regional Director for Yorkshire and the Humber, said:

“While most regions painted a weak economic picture in the second quarter, Yorkshire and Humber stands out as a region showing resilience – reporting the highest business confidence in the UK. Optimism was driven by projections of healthy sales and exports pipelines, and strong profit forecasts. The region has seen growth in recent years, particularly in the finance and fintech sectors, with Leeds leading the charge as the ‘Northern Square Mile’.

“Although businesses continue to face economic and geopolitical uncertainty, the region's diverse economy, strong pipeline of investment and continued focus on regeneration are helping to support a more positive outlook.”

Kim Johnston, ICAEW Director, Scotland, said:

“There has been a sharp drop in business confidence in Scotland, mirroring the results we’ve seen across most of the UK. This comes amid a context of concern from companies around geopolitical risks, cost pressures and subdued sales.

“With widespread economic disruption caused by conflict in the Middle East, it’s unsurprising that energy costs were the biggest challenge reported by Scottish businesses, the most acute in any UK region we surveyed. Scottish businesses also reported concerns about exports growth which likely follows slowing US demand for Scottish whisky and salmon as a result of tariffs.

“The findings suggest that ongoing uncertainty and cost pressures are increasingly influencing business decision-making, with many firms adopting a more cautious outlook for the coming year.”

Robert Lloyd Griffiths, ICAEW Director for Wales, said:

“Despite a decline in business confidence in Wales, it’s pleasing to see that domestic sales are forecast to increase in the next year, demonstrating optimism among our businesses.

“From Caerdydd to Clwyd, Wales is strongest when we all work together. We look forward to speaking to colleagues in the new Westminster government and the Senedd to deliver growth and prosperity for the Welsh economy.

Simon Gray FCA, ICAEW Regional Director for the East Midlands, said:

“Businesses in the East Midlands have been clear about the impact of the conflict in Iran on their confidence, with sentiment dropping significantly this quarter. It is particularly notable that two-thirds of our companies said energy costs were their biggest challenge, more widely cited than in any other UK region.

“Businesses have reported falling confidence for the seventh straight quarter, which shows how key sectors in the region – including energy-intensive manufacturing and transport – are being affected. With lower domestic sales forecast and increased cost pressures, businesses are unsurprisingly looking to be more cautious about their investment plans for the year ahead.”

Meghan Doyle, ICAEW Regional Director for London, said:

“Our findings show that London’s businesses have been impacted by uncertainty and higher costs resulting from the Iran War, with geopolitical risk topping the list of firms’ concerns.

However, the capital’s largely service-based economy was somewhat insulated from the full impact of geopolitical uncertainty, with sales growth reaching a three-year high driven by the IT and communication, banking, finance and insurance sectors.

“London’s companies remain concerned about the high cost of doing business especially rising wage bills, as salary growth in the capital outpaced most of the UK. Businesses continue to proceed with caution about investment decisions and are therefore planning to slow spending over the coming year.”

Justin Kyriakou, ICAEW Regional Director for the North West and Acting Director of Regional Engagement, said:

“ICAEW members have told us that the difficult macroeconomic environment, including the conflict in Iran and closure of the Strait of Hormuz, created a perfect storm of challenges for British businesses in the quarter.

“Companies in the North West – like most UK regions – reported a sharp fall in confidence in the second quarter, including the weakest yearly exports growth of any UK region, though firms are optimistic that exports and sales will improve next year.

“New Prime Minister Andy Burnham must prioritise cultivating the conditions for companies to thrive and grow, including reducing the complexity, cost and uncertainty that are holding them back.”

ENDS

Notes to editors:

Reports for each nation/region are available on request.

1. The Business Confidence Monitor (BCM), which is one of the largest and most comprehensive quarterly surveys of UK business activity, began in 2004.
2. 1,000 Chartered Accountants based in the UK responded to a telephone survey between 13 April and 19 June. 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.

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), British Business Bank and the Small Business Commissioner.