Q1: London business confidence rises into positive territory as concerns about the tax burden ease.
The latest national Business Confidence Monitor (BCM) shows that business sentiment was on course to move into positive territory in Q1 2026, but the outbreak of the Iran war had a dramatic impact in the final weeks of the survey period, with confidence deteriorating sharply. While businesses reported improved annual domestic sales and exports growth and easing input price inflation compared with Q4 2025, the war introduced significant downside risks to the outlook for the coming year.
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 12 January to 16 March 2026.
- Business confidence in London rose to +3.5 in Q1 2026, moving above the UK (-1.1) but remaining below its historic norm (+5.4).
- Improved domestic sales and particularly strong exports underpinned a rise in optimism as reports of tax pressures eased significantly.
- Concern about regulations also eased back to the survey norm, while reports about customer demand and competition dropped below average.
- Labour costs are a significant concern in London as employment growth remained subdued but is expected to pick up.
- Input cost inflation ticked down and London businesses were the least likely in the UK to report energy prices as a growing challenge.
- Capital investment and R&D budgets rebounded strongly with businesses planning to maintain growth above the historical averages next year.
Business confidence in London
Sentiment in London rose to its highest level since Q4 2024, with the score returning to positive territory in Q1 2026 at +3.5. The region has moved ahead of the UK average (-1.1) and is the second highest confidence score behind only the North West (+9.9). However, despite the improvement the score remains below the regional historical average (+4.6) with the Iran war hitting sentiment in the final weeks of the survey period.
The rise in confidence over the quarter was underpinned by easing business concerns, particularly around the tax burden, following November’s Budget, and customer demand as sales growth picked up, with notably strong exports growth. The robust outlook for the coming year has likely been impacted by events in the Middle East, with weekly national survey data showing a sharp decline in confidence over the final two weeks of the survey period.
Domestic sales and exports growth
Annual domestic sales growth picked up to 3.8% in Q1 2026, with the capital outperforming the national average (3.5%) and its historical norm (3.0%). Businesses were optimistic that domestic sales growth would accelerate in the coming year, predicting growth of 5.6% and marginally ahead of the UK projection of 5.4%.
Exports growth was stronger still, with businesses in the capital reporting growth of 4.3% in the year to Q1 2026, the highest since Q4 2022, and among the strongest performances across the UK. However, companies predicted a slight easing of growth to 4.0% in the year ahead, with some of the weaker outlook attributable to the Middle East conflict. However, the predictions set by most companies surveyed in the quarter would have been formed before the Iran war and the subsequent impact on inflation and confidence has placed additional risk on the forecast outlook.
Business challenges
Business concern regarding some of the most significant challenges in recent quarters eased in London in Q1 2026. Most notably, the proportion of companies reporting the tax burden as a growing challenge dropped back to 51%, down from 60% last quarter and the lowest recorded since Q4 2024. The rate is still significantly higher than the historical norm (21%) but dropped below the national average (53%).
Reports of the regulatory burden also dropped to 43%, matching London’s historical average, while customer demand fell to 28%, some 10 percentage points below the norm and among the lowest proportions recorded across the UK. Concerns about competition in the marketplace also nudged below the historical average, providing further evidence that the trading environment had improved for businesses in the first quarter of the year.
However, labour costs are a significant growing challenge for business following the rise in employer National Insurance Contributions last April, increases to minimum wage and concerns about the potential additional costs associated with the implementation of the Employee Rights Act this year. Half (50%) of London businesses cited labour costs, which was included in the survey for the first time this quarter. However, this proportion was lower than the UK average (56%) and lower than all regions apart from the East Midlands (48%).
Labour market
With labour costs such a prominent concern, businesses reported that annual employment growth ticked up marginally to 1.2% in Q1 2026, slightly ahead of the UK average (1.1%) but remaining below London’s historic norm (1.6%). Companies anticipate that growth will rise to match the historical average next year, outpacing the national projection (1.3%).
Despite muted labour demand, companies reported that salaries rose by 3.2% in the year to Q1 2026, significantly higher than the London norm (2.1%). However, they eased slightly from the previous quarter and were in line with the UK average (3.2%). Businesses anticipate wage inflation will continue to soften over the coming 12 months, predicting growth of 2.7%, slightly below the national projection (2.9%).
Like most other parts of the UK, cooler labour market conditions meant concern about skills availability (management and non-management) eased further below their respective historical norms and the growth in staff training budgets remains muted.
Input prices, selling prices and profits growth
Inflation has been slow to retreat in London, but businesses reported that input price inflation ticked down to 3.5% in the year to Q1 2026, the lowest rate since Q4 2024. Companies were optimistic that the slowdown would continue into the coming year, predicting input prices would grow by 2.8%, below the national projection (3.0%) and among the lowest projections across the UK. However, the impact of the Iran war on oil and gas prices has placed upward pressure on fuel and energy prices which is not fully reflected in these expectations.
London may be relatively less exposed to higher energy prices as its industrial structure is skewed towards lower energy users, particularly in the Business Services sector. Indeed, the survey asked companies about energy prices as a growing challenge and London had the lowest proportion of businesses citing the concern at 28%, compared to 35% nationally.
Businesses in London again recorded the softest uplift in selling prices of any UK region, at just 1.8% in the year to Q1 2026 but remaining above the region’s historical average (1.3%). Companies anticipate that growth will continue at the same pace over the coming year, with the projected rise of 1.8% lower than the 2.3% anticipated across the UK.
Despite sticky inflation, improved sales again fed through to further profits growth in London, which rose again to reach 4.4% in Q1 2026, 1 percentage point above the historical norm (3.4%) and second only to the East Midlands (5.9%). Businesses anticipate profits will expand by 5.4% next year, stronger than the UK average projection (5.2%). However, stronger inflation and weaker sales could dent the outlook, particularly in the near term.
Investment
Capital investment ticked back up to 2.7% and above the historical average (2.2%) in the year to Q1 2026, following the dip reported last quarter. Businesses plan to slow growth to 2.3% next year, among the highest rates expected across the UK, below only the forecasts for the North East (4.0%).
R&D budgets growth also suffered a dip last quarter but improved to 2.3% in Q1 2026, rising back above the historical norm (1.7) and the national average (2.1%). Companies plan to maintain above average growth next year at 2.0%, again second only to the projection for the North East (2.6%).