Q1: Scottish business confidence lifts into positive territory but Iran war poses significant risks to the outlook.
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.
- Sentiment in Scotland lifted to +2.1 in Q1 2026, above the UK average (-1.1) but confidence dipped following the outbreak of the Iran war in late February.
- Improved domestic and export sales growth alongside falling input cost inflation supported the relatively upbeat outlook.
- Concerns about the tax burden remain the primary challenge with labour costs a close second, as Scottish businesses reported the fastest annual salary inflation and employment growth in the UK.
- Capital investment is expected to improve significantly next year, likely boosted by plans in the energy sector, while R&D budget growth is set to slow sharply.
Business confidence in Scotland
Business sentiment in Scotland lifted out of negative territory in Q1 2026, rising to +2.1 from -12.7, and climbing above the UK average (-1.1). However, following the outbreak of the Iran war, national weekly survey data indicated a fall in confidence and Scotland’s overall score remains below the region’s historical norm (+6.0).
The most immediate economic impact of the conflict in the Middle East was felt through the rise in road fuel prices, as global oil and gas prices rose sharply. Amid heightened global uncertainty, disruptions to major shipping routes such as the Strait of Hormuz could impact key Scottish exports, including whisky, oil and salmon.
Official data shows that the Scottish economy was carrying little momentum into 2026, with growth of just 0.1% in Q4 2025. However, the most recent monthly data was more encouraging showing a 0.5% rise in GDP in January 2026 compared to December. Meanwhile, political parties are gearing up for the forthcoming Scottish elections on 7 May, with a BBC poll showing that the economy was among the main issues for voters ahead of the elections alongside the cost of living, healthcare and the NHS.
Domestic sales and exports growth
Scottish businesses reported a marginal rise in annual domestic sales growth in Q1 2026 to 5.5%. The outturn was well above both the historical norm (3.0%) and the UK average (3.5%) and was the largest uplift since Q2 2023, likely driven by strong growth reported by the locally important Energy, Water & Mining and Banking, Finance & Insurance sectors. Companies were optimistic that growth would improve further to 5.9% over the next 12 months but these expectations were largely formed before the outbreak of the Iran war and have likely since deteriorated.
Annual exports growth picked up to reach 2.6% in the quarter, following flat growth in Q4 2025. However, the reported expansion was slower than the UK average (3.3%) and down on Scotland’s historical average (2.9%). Businesses forecast that exports growth will nearly double to 4.9% over the coming year, ahead of all other regions, but the potential impact of the Iran war, including risks to global shipping which could affect key Scottish exports alongside inflationary pressures and wider uncertainty, are likely to weigh on prospects in coming months.
Business challenges
The tax burden continues as the main growing challenge for Scottish businesses, reported by 56% of companies in Q1 2026. Concern about the issue has fallen since the record highs recorded in recent quarters but remains nearly three times the historical survey average (19%) and above the UK average (53%).
Companies were asked about labour costs for the first time this quarter and the challenge was cited by 51% in Scotland, slightly lower than the UK average (56%) despite evidence from the survey that annual salary growth in the quarter in Scotland was the highest nationally. Scottish companies were also asked about energy costs for the first time, with 31% reporting the issue as a growing concern compared to 35% across the UK, with the proportions not fully reflecting the rise in energy prices since the start of the Iran war.
Elsewhere, customer demand (30%) remained steady while competition in the marketplace (27%) eased further for Scottish businesses, and both were less prevalent compared to the national averages (36% and 33% respectively). However, concerns over access to capital increased again in Q1 2026 and were notably above the UK average (13%), at 32%. Late payments, another sign of potential financial stress, were in line with the historical norm at 20% and comparable to the UK (19%).
Labour market
Businesses reported an uptick in employment growth in the year to Q1 2026, with staff levels rising by 2.4%, twice the historical norm (1.2%) and the fastest rate in the UK. Rising labour costs are likely part of the reason why companies plan to slow growth to just 0.5% in the coming year, as annual salary growth rose to 4.0%, the highest rate in the UK and nearly twice the historical norm (2.2%). Companies expect wage inflation to continue at the same pace next year, also the highest projection across all parts of the UK.
Coming off the back of a period of weak employment growth, business concerns about skills availability were below their respective historical averages, while staff turnover eased back to 22% and close to the historical average (21%). Meanwhile staff training budgets (1.2%) edged close to the historical norm of 1.3%.
Input and selling prices, and profits growth
Scottish companies reported that input price inflation slowed to 3.9% in the year to Q1 2026, down from the previous quarter, and only slightly above the UK average (3.6%). Businesses project that inflation will remain sticky, expecting input price inflation of 3.8% in the coming year, markedly above the historical average (2.7%). However, the Middle East conflict poses significant risks to the inflation outlook.
In the face of sticky input price inflation, Scottish businesses have been raising their selling prices in recent quarters. In Q1 2026, companies increased their prices by 3.5%, the third consecutive rise and over twice the historical norm (1.6%). Only businesses in Wales lifted their prices at a faster rate (3.8%). Expectations were that selling prices would ease to 2.6% in the coming year but, with energy and materials costs set to rise, businesses may be forced to raise their prices by a greater degree.
Annual profits growth edged up to 3.3% in Q1 2026, close to the historical average (3.4%) and higher than most other parts of the UK and the national average (3.1%). With strong sales projections, companies projected profits growth of 5.7% next year but this was before many factored in the impact of the Iran war which has likely since dampened expectations.
Investment
The investment environment became increasingly divergent in Scotland in Q1 2026. Capital investment slowed to just 1.1% in the year to Q1 2026, the weakest rate across the UK and nearly half the survey norm (2.1%). At the same time, R&D budgets expanded by 2.5% in Q1 2026, second only to the East Midlands (2.8%) and above the historical average (2.0%).
While Scottish businesses are among the most optimistic for the year ahead for capital investment, anticipating above average growth of 2.3%, likely linked to investments in the Energy, Water & Mining sector, they are pessimistic about the prospects for R&D growth at just 0.3%.