Q1: Business confidence lifts into positive territory but remains short of historical norm.
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 the North East rose to +2.1 and above the UK (-1.1) but remains below the historical norm following the outbreak of the Iran war.
- Strong domestic sales and exports growth supported the rise in confidence, with businesses predicting robust growth for the coming year.
- The tax burden is the most significant challenge alongside labour costs, while customer demand and regulations remain elevated.
- Companies expected input prices inflation to continue to ease but the Iran war poses significant challenges to the predicted outlook.
- Investment in the region is expected to improve significantly, with businesses planning the strongest growth in capital investment and R&D budgets.
Business confidence in North East
Sentiment rose into positive territory in the North East in Q1 2026, with the Business Confidence Score hitting +2.1 and above the UK average (-1.1). However, despite the improvement over the quarter, sentiment dropped sharply towards the end of the survey period following the outbreak of the Iran war in late February, and the regional score remained short of its historical average (+5.8).
The confidence improvement followed a period of heightened uncertainty ahead of the November Budget and record-high concerns about the tax burden on businesses. Fears about potential higher taxation appear to have eased as most of the measures announced in the Budget are delayed until later in this parliament. Alongside this, businesses reported much stronger annual performance in the quarter, helping to boost confidence, but the Iran war poses significant risks to the outlook for the year ahead.
Domestic sales and exports growth
Domestic sales growth lifted to its highest rate since Q3 2024, with businesses reporting a 4.3% annual expansion in Q1 2026. This was above the national average (3.5%) and among the fastest rates reported across the UK. Companies were upbeat about prospects for the coming year, predicting a 5.7% rise over the next 12 months. Similarly, exports growth increased to 5.6%, the highest rate nationally and over twice the historical average (2.5%). Business expected exports growth to ease to 4.0% in the North East next year, however the prospects for both domestic sales and exports have likely weakened due to higher inflationary pressures linked to the Middle East conflict.
Business challenges
Despite easing compared to recent quarters, the tax burden remained the most widespread growing challenge for North East businesses, reported by 55% in Q1 2026 and over three-times the regional historical average (17%). This was broadly comparable to the UK average (53%). Companies were asked for the first time about labour costs in Q1 2026, and the challenge was cited by over half (51%), likely linked to the rise in employer National Insurance Contributions and increases to minimum wages. The issue was less widespread than in many other regions however, and below the national average (56%).
Although sales improved significantly in Q1 2026, businesses continue to be concerned about customer demand, with 39% reporting the issue as a growing challenge and above the historical and UK average (both 36%). Regulatory challenges (44%) also remain elevated for companies in the region and, although the proportion is slightly lower than the UK as a whole (47%), it is high compared to the historical average (39%).
Labour market
Employment growth in the North East remained subdued in Q1 2026, continuing at 0.5% and matching the annual growth rate reported last quarter. This is significantly short of the historical norm (1.3%) and the national average (1.1%). Businesses predict an uplift to 1.1% next year, somewhat weaker than the national projection (1.3%).
While labour market conditions remain cool in the region, concerns about the availability of both management and non-management skills in the region dropped further below historical norms. Indeed, just 2% of businesses raised the availability of management skills as a growing challenge compared to 14% historically. Issues with staff turnover have also relented, reported by just 7% compared to 19% historically.
With labour demand remaining soft, wage inflation slowed to 3.1% in the year to Q1 2026, among the slowest rates of pay growth nationally. Businesses anticipate the rate of pay growth to ease to 2.8% in the coming 12 months, closer to the historical norm (2.2%).
Input and selling prices, and profits growth
After consecutive rises, input price inflation in the North East slowed to 3.8% in Q1 2026, just ahead of the UK average (3.6%). Companies expected a sharp slowdown to 2.4% next year, below the historical norm (2.8%) and the lowest growth projected across the UK. However, many of the projections were formed ahead of the Iran war and its inflationary impact on oil and gas prices will have placed greater upward pressure on cost expectations. Businesses were asked for the first time this quarter about energy costs as a growing challenge, and the issue was cited by 34% with a larger proportion of businesses likely to come under pressure because of the Middle East conflict.
Companies reported that their selling prices rose by 2.6% in the year to Q1 2026, just above the national average (2.3%). Businesses in the North East predict they will continue to raise their prices at the same rate next year, above the historical norm (1.7%) but upward cost pressures may translate to higher price rises.
Despite improved sales and easing input cost pressures, businesses reported another quarter of below par annual profits growth in Q1 2026, rising by just 1.6%. This was the lowest UK rate and nearly half the historical average (2.9%). With sales expected to rally, companies predict a significant improvement to 6.2% in the coming 12 months, however the Iran war has likely dampened profits growth expectations.
Investment
Annual capital investment eased to just 1.5% in Q1 2026, lower than the historical norm (2.3%) and behind most other parts of the UK. Businesses in the North East plan a large improvement to 4.0% next year, likely driven by the investment plans of businesses in the Energy, Water & Mining sector. The capital investment outlook in the region is the most optimistic in the UK.
The growth in R&D budgets in Q1 2026 was more positive, as growth of 1.8% matched the regional historical norm. Companies plan to expand growth to 2.6% in the coming year, the strongest rate across the UK and nearly twice the national average (1.4%).