Q3: Business confidence in the East Midlands recovers sharply but remains in negative territory.
- Business confidence in the East Midlands rose to -6.7 from -22.3 in Q2, its highest score since Q3 2024, but remained below the UK average.
- Domestic sales growth remained strong and companies upgraded their expectations for the year ahead, while exports growth slowed but is expected to pick up.
- Labour costs and the tax burden were widespread concerns, with energy costs and transport problems less widely cited than in the previous quarter.
- Employment growth picked up and businesses continued to raise pay well above the UK average, with similar salary growth expected next year.
- Input price and selling price inflation both eased, while profits growth remained above the UK average and is expected to strengthen.
- Capital investment outpaced national trends, but firms remain cautious. R&D growth has weakened, although businesses expect a recovery.
Business confidence in East Midlands
Business sentiment in the East Midlands improved markedly in Q3 2026. The Business Confidence Index rose from -22.3 in Q2 to -6.7, its highest level since Q3 2024. However, the index remained negative for an eighth consecutive quarter and below both its survey average score of +2.5 and the UK average (-0.5).
Businesses in the East Midlands reported robust domestic sales growth and upgraded their expectations for the year ahead, while fewer companies cited energy costs and transport problems as growing challenges than in the previous quarter. The sharp improvement in sentiment among Manufacturing & Engineering businesses across the UK, an important sector in the region, likely supported the uplift. Nevertheless, labour costs and the tax burden remain significant concerns and, with renewed US-Iran hostilities driving up oil and gas prices towards the end of the survey period, geopolitical uncertainty continues to weigh on the outlook.
Domestic sales and exports growth
Annual domestic sales growth in the East Midlands remained strong at 5.6% in Q3 2026, among the fastest rates in the UK and well ahead of both the 3.6% rate recorded nationally and the region's historical norm (3.0%). Having been downbeat last quarter, companies have become more optimistic about the year ahead and now anticipate growth of 5.3%, compared with the national average forecast (4.3%).
In contrast, annual exports growth slowed to 1.8% in Q3 2026, lagging both the 2.8% rate recorded nationally and the historical average (2.6%). Businesses nonetheless remain upbeat about external trade and predict exports growth will pick up to 4.8% over the next 12 months, outpacing the 4.1% rise forecast nationally. Manufacturing & Engineering companies across the UK are optimistic about significant exports growth next year, which is likely to underpin the positive projection for the East Midlands.
Business challenges
Despite the ongoing disruption in the Middle East, labour costs were the most widely reported challenge in the East Midlands in Q3 2026, cited by 60% of businesses and above the national average (53%). However, this was closely followed by geopolitical risk at 57%, broadly in line with the national average (58%). The effects of the US-Iran conflict on energy costs also remain evident. While fewer businesses cited energy costs than in the previous quarter, at 53% the proportion was among the highest in the UK and above the national average (45%), reflecting the importance of energy-intensive manufacturing in the region. Transport problems eased notably to 15%, below the UK average (18%) and in line with the regional norm (16%).
The tax burden remains a significant challenge in the East Midlands and was reported by 51% of businesses in Q3 2026, up from last quarter and well above the 41% recorded nationally. Regulatory concerns were unchanged at 44%, slightly below the UK (46%) but above the historical norm (40%). More positively, customer demand concerns eased to 31%, below both the national average (36%) and the historical regional norm (41%), consistent with the region's robust sales performance. Late payments were cited by 21% of businesses, down from last quarter and broadly in line with the historical norm (22%).
Labour market
Despite evidence of weakening labour demand nationally, businesses in the East Midlands continue to report relatively buoyant jobs growth of 1.8% in the year to Q3 2026. This is ahead of both the rate recorded nationally (0.7%) and the regional norm (1.0%). Businesses plan to accelerate hiring over the next 12 months, projecting jobs growth of 2.6% and above the 1.5% rise anticipated across the UK.
Reflecting the widespread concern about labour costs, businesses reported that they raised pay by 3.6% in the year to Q3 2026. While this was slightly softer than in the previous quarter, it was among the fastest rates in the UK and well above both the UK average (2.8%) and the regional norm (2.2%). Businesses expect pay growth to remain at 3.6% over the next 12 months, compared with the weaker 2.6% increase anticipated by firms across the UK.
Input and selling prices, and profits growth
Annual input price inflation in the East Midlands eased to 3.7% in Q3 2026, slightly below the 3.9% rate recorded nationally but well above the region's historical norm (2.8%). Businesses expect cost pressures to moderate further over the next 12 months, predicting input price inflation of 3.3%, though this is still above the UK average projection of 2.9%. With oil and gas prices rising again in September, there are upside risks to this outlook.
The BCM shows that businesses in the region continue to only pass some of the elevated input price inflation on to their customers. Selling price inflation continues to run ahead of its historical norm (1.6%) but slowed to 2.0% in the year to Q3 2026 and below the UK average (2.2%). Companies in the region plan to raise prices at a similar pace of 2.1% over the coming year, in line with the national forecast.
Annual profits growth eased to 3.6% in Q3 2026 but remained ahead of both the 3.3% rate recorded nationally and the region's historical average (2.6%), supported by robust domestic sales growth. With stronger sales expected and input price inflation forecast to ease, companies predict profits growth will pick up to 4.7% over the next 12 months, slightly above the 4.5% rise forecast nationally.
Capital investment and R&D
Annual capital investment growth in the East Midlands expanded by 2.8% in Q3 2026 and continued to outpace both the UK average (2.3%) and the regional norm (2.0%). Businesses remain cautious about investment prospects and plan to increase capital expenditure by 1.8% over the next 12 months, lower than the 2.0% rise anticipated UK-wide.
Annual R&D growth slowed to 0.8% in Q3 2026, well below the 2.3% rate recorded nationally and the region's historical norm (1.8%). Nationally, a recent ICAEW pulse survey found that more firms sought productivity and efficiency improvements in response to rising costs than raised prices, which may encourage further innovation investment. Companies in the East Midlands plan to lift R&D growth to 1.8% over the coming year, broadly in line with the UK projection (1.9%).
UK results
The UK Business Confidence Index rebounded to -0.5, from -14.6 in Q2, but remained negative for a seventh consecutive quarter. Current sales and profits proved resilient, but firms downgraded their expectations for both over the next 12 months. Geopolitical risk remained the leading challenge, while elevated input and labour costs continued to put pressure on margins. Energy costs, regulations and the tax burden remain significant challenges. The rebound was broad but uneven: confidence rose in every sector, IT & Communications was the most positive, while Property and Construction remained deeply negative.
The latest quarterly findings are based on the period 13 July to 21 September 2026.