The outbreak of the Iran war has created mounting concerns over sales performance, inflation and energy costs, according to the Business Confidence Monitor (BCM) – a survey of 1,000 business leaders.

Prior to the beginning of the conflict, sentiment had markedly improved since the previous quarter, and was on track to shift into positive territory for the first time since Q4 2024. Q1 2026 sentiment fell from +2.8 on the eve of the conflict to an overall reading of -1.1 by the end of the 10-week survey period.

While this is still a great improvement on the -11.1 reading in Q4 2025, the war has kept sentiment negative for five successive quarters – the longest period in more than six years.

The uncertainty of the run-up to the Autumn Budget had gradually eased over the course of Q1. As the Middle East conflict ramped up, however, worries about supply chain disruption, energy costs and slower sales suddenly ramped up.

“The first quarter was a tale of two halves for the UK economy as the early-year optimism was dramatically snuffed out as the Middle East conflict refueled fears over skyrocketing cost pressures and wider economic conditions,” said Suren Thiru, ICAEW’s Chief Economist.

Domestic and export sales expectations for the next 12 months decreased after the war began. At the same time, selling price inflation expectations for the period increased. Energy costs were a concern for 35% of firms surveyed, with worries highest in transport and storage, energy, water and mining, and retail and wholesale – all energy-intensive sectors.

“Though the impact of the conflict on first quarter growth may be limited, the economic mood is turning increasingly bleak and with projections of future sales already deteriorating and inflation expectations rising, stagflation is a growing danger,” said Thiru.

In a separate ICAEW survey published last month, respondents said that they wanted the government to offer support with energy bills to help during the course of the conflict.

“Businesses have been thrown yet another damaging curveball as they battle to keep their heads above water after a tough few years for the UK economy,” Alan Vallance, ICAEW Chief Executive, said. “The UK economy is clearly exposed to instability in the Middle East, and the longer the war lasts the greater the damage from rising energy costs and supply chain disruption.”

He urged the UK government to prepare to provide financial support to British businesses as the conflict continues.

Labour costs are still an issue

More than half of businesses (56%) were troubled by labour costs in Q1; a persistent challenge over the past few quarters. Labour-intensive sectors like retail and wholesale (69%) and construction (67%) have been hit hardest by recent changes to employment costs.

Last year’s national insurance increase is still having an impact, coupled with concerns about the impact of the Employment Rights Act and the minimum wage increase in April. 

“Soaring worries over labour costs underscore the job market’s vulnerability to the fallout from the Iran war as businesses already weakened financially by these outlays will likely seek further savings by cutting hiring as higher energy bills set in,” said Thiru.

The tax burden has eased a little

The proportion of firms citing the tax burden as a major concern fell from 64% in Q4 2025 to 53% in Q1 2026. Despite this improvement, this rate is still almost three times the historic average of 19%.

A mixed picture across sectors

Confidence varied wildly from sector to sector, from retail and wholesale at -11.0, to energy, water and mining at +12.9. Transport and storage and construction were also notably negative, with sentiments standing at -9.7 and -8.6 respectively.

“Even though events in the Middle East continue to dominate, the Chancellor must be careful not to take her eye off the ball at home, with businesses increasingly voicing their concerns over rising labour costs,” Vallance said.