Q1 2026: Retail & Wholesale confidence remains deeply negative as higher labour costs pose a major challenge.
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.
- The Business Confidence Index for Retail & Wholesale rose slightly to -11.0 in Q1 2026 but remained the lowest of all sectors and well below the UK average (-1.1).
- Domestic sales grew for the second consecutive quarter and businesses anticipate further expansion, though the Iran war is likely to have tempered the outlook.
- Labour costs were the most widely reported challenge, while concerns about taxation and regulatory requirements also remained elevated.
- Employment expanded for the first time in a year, but job growth expectations remain muted.
- Companies reported the highest annual input price inflation and hold the lowest profits growth expectations of any sector.
- Capital investment and R&D budget growth improved but companies intend to slow their growth over the coming year.
Business confidence in the Retail & Wholesale sector
Confidence in Retail and Wholesale edged up in Q1 2026 to -11.0 from -16.6 in the previous quarter but remained deeply negative, well below both the UK average (-1.1) and the sector’s historical average (-0.5), and the weakest across all sectors. The Middle East conflict has undermined likely expectations and risks to the outlook are now weighted to the downside.
The sector continues to face significant headwinds that are dampening business confidence. The latest ONS data show that after dropping in the two previous months, retail sales volumes rebounded in December 2025 and January 2026, rising by 0.4% and 1.8% m/m respectively, but fell 0.4% m/m in February. Although concern about customer demand is now close to the sector’s historical average, Retail & Wholesale firms remain among the most worried about demand. The Bank of England’s March 2026 Agents’ Summary of Business Conditions notes that consumer goods and services sales volumes remain subdued. The BCM also finds labour-cost pressures to be particularly acute, as the sector relies heavily on entry‑level and low‑wage contracts, making it highly sensitive to National Minimum Wage increases such as the rise in April. In addition, the Employment Rights Bill passed in late 2025 could bring significant operational and compliance changes for the sector, adding to rising concerns about regulations as reported by the BCM. Concern about energy costs, which remain high in the Retail & Wholesale sector, are likely to amplify as a result of the conflict in the Middle East.
Domestic sales growth and customer demand
Domestic sales continued to expand for the second consecutive quarter, with growth of 3.6% recorded in Q1 2026. This is above both the sector’s historical average (2.9%) and the national average (3.5%). Businesses are cautiously optimistic about the coming year, expecting growth to reach 4.9%, albeit below the sector-wide outlook (5.4%). This view appears to be underpinned by early signs of demand recovery. Although it remains above the national figure (36%), the share of firms citing customer demand as a growing challenge fell to 47% from 61% last quarter. However, most responses were collected before the conflict in Iran, which is likely to have dented expectations.
Business challenges
The cost of labour was the most prevalent growing concern for the Retail & Wholesale sector, reported by 69% of businesses. This is a new challenge captured in the survey and businesses in the sector are particularly exposed to labour costs since they employ a large share of low-paid and entry-level workers, meaning that the increases to minimum wages translate directly into higher costs for the Retail & Wholesale sector. The British Retail Consortium (BRC) calculated that retail employment costs rose by £5bn in 2025 as a result of increases to the National Living Wage and employers’ National Insurance Contributions.
The tax burden and regulatory requirements remained high on the list of businesses concerns, reported by 61% and 50% of Retail & Wholesale companies respectively. Both challenges reached historical highs in the last quarter, likely a result of the passing of the Employment Rights Act at the end of 2025, and although they were cited less frequently in Q1 2026, both remained significantly above their historical averages. Energy costs also ranked as a growing concern for 40% of businesses with the rise in energy prices due to the Iran conflict likely to reinforce these concerns, particularly in the near term.
Labour market
The sector reported a rise in employment this quarter for the first time since Q1 2025. Annual employment grew by 0.6% in Q1 2026, close to the sector’s historical average (0.8%) but below the national average (1.1%). Looking ahead, firms expect headcount to grow by 0.6% over the next 12 months, well below the national outlook (1.3%). This suggests that concerns about rising labour costs and changing regulation such as the introduction of the Employment Right Bill, are weighing on hiring plans.
Annual salary inflation increased in the sector to 3.2% in Q1 2026, in line with the national average. Businesses expect a further 3.0% increase over the next year, slightly above the national projection of 2.9%, reflecting ongoing labour cost pressures in the sector.
Reflecting weaker labour demand in Retail & Wholesale, concerns about skills availability have eased in recent quarters. In Q1 2026, only 11% of surveyed businesses reported non-management skill shortages and 7% reported management-skill shortages. In both cases, this stood below the national averages and the sector’s historical averages.
Input and selling prices, and profits growth
Input price inflation ticked down to 3.9% in Q1 2026 from 4.1% the previous quarter, but a significant gap remains to the historical average (2.6%). Businesses expect input price growth to slow to 2.8% in the year ahead, dropping below the national average of 3.0%, but the risks to the outlook have risen since the outbreak of the Iran war.
A similar trend is reported for selling prices, which rose by 2.7% this quarter, yet representing a slight deceleration compared to the end of 2025. Businesses in the sector plan to increase their selling price by 2.4% over the next 12 months, in line with the national projection (2.3%), but ahead of the sector historical norm (1.6%).
Despite tough market conditions, companies reported above-average annual profits growth of 3.1% in Q1 2026, matching the pace recorded last quarter. Across sectors, Retail & Wholesale firms are, however, the most pessimistic about the coming year, expecting profits to rise by 3.8%, which is well below the national average (5.2%).
Investment
Capital investment growth lifted to 1.9% in Q1 2026, above the historical average for the sector (1.7%) but below the national average (2.5%). Businesses plan to slow their investment over the next year to 1.1% compared to 1.9% projected on average across the UK.
There was an uptick in R&D budget growth in Q1 2026, with businesses reporting budgets expanded by 1.6% this quarter, outperforming the sector historical average (1.4%). This likely reflected a bounce back from the dip recorded in the last quarter of 2025 (0.7%). Companies plan to expand R&D budgets by 1.0% over the next year, below the national average forecast of 1.4%.