Q1: Confidence in the South East remains negative amid slowing domestic sales growth.
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 the South East improved to -7.1 but confidence continues to lag behind the UK average (-1.1).
- Annual domestic sales growth slowed and the outlook is weak compared to the rest of the UK.
- Businesses in the South East continue to be more likely to report concerns across a range of growing challenges than the national average, including tax, regulations and customer demand.
- Employment growth also remains muted, with labour costs the most widely cited challenge in the region.
- Input price inflation relented but profits growth edged down.
- Businesses plan to expand their capital investment but moderate R&D growth.
Business confidence in South East
Business confidence in the South East improved to -7.1 in Q1 2026, its highest score in a year, but the region continues to lag behind the UK average (-1.1) and its historical norm (+4.6).
The outbreak of the Iran war will add further uncertainty to the outlook for businesses in the region, as larger proportions of companies than the UK average reported that labour costs and the tax and regulatory burden were a growing challenge to their performance this quarter, alongside weak domestic sales and customer demand issues.
Domestic sales and exports growth
Annual domestic sales growth slowed to just 2.1% in Q1 2026, the second lowest rate reported across the UK and significantly below the national average (3.5%) and historical regional norm (3.2%). Businesses in the South East continue to expect prospects to improve but their projected growth of 4.4% for the coming 12 months is the weakest forecast in the UK and notably lower than the average prediction (5.4%).
Exports growth was more encouraging at 3.4% for the year to Q1 2026, up slightly from the previous quarter and the national average (3.3%). Companies anticipate growth of 4.8% in the coming year, increasing the gap to the historical norm (3.2%) and above the UK-wide forecast (4.1%). The relative optimism is likely linked to the above average expectations of the Business Services and IT & Communications sectors, which have a strong presence in the region. However, the domestic and exports sales forecasts were largely set before the Iran war and the downside risks to the outlook have since risen.
Business challenges
Businesses in the South East continue to be more likely to report concerns across a range of growing challenges than the national average. The primary concern in recent quarters has been the tax burden and, while the proportion of businesses citing the issue dropped to 58% in Q1 2026, it remains above the national average (53%) and almost three-times the historical norm (20%). The main concern is now labour costs, which was reported by 60% of businesses in the region, also above the national average (56%). This was the first time the challenge was included in the survey and the high reading reflects the rises to employers’ National Insurance Contributions last April, minimum wage increases and the uncertainty relating to potential additional costs from the implementation of the Employee Rights Act this year.
With below par domestic sales growth, businesses in the South East were the most likely to report customer demand (46%) as a growing challenge. Regulatory requirements (54%) are also more widely reported than in other parts of the UK except Wales (60%). Both concerns remain above their respective survey norms.
Labour market
Labour demand remains weak in the South East, with companies reporting growth of just 0.6% in the year to Q1 2026, less than half the national (1.1%) and historical averages (1.3%). However, the outcome still represented an improvement on the previous quarter and businesses remain optimistic that the rate of recruitment will rise in the coming year. Companies plan to increase employment by 1.1% over the coming 12 months, marginally lagging the nationwide projection (1.3%).
Businesses reported an uptick in wage inflation in Q1 2026, with annual salaries rising by 2.7%. However, reflecting the weakness in the local labour market, this was the lowest rate reported across all UK regions and below the national average (3.2%). Companies in the region expect wage inflation to pick up slightly to 3.0% in the year ahead at a rate comparable to the UK projection (2.9%).
Unusually, while concerns about skills availability as a growing challenge eased in recent quarters amid cooler labour market conditions, they ticked up in Q1 2026 in the South East. The availability of management skills, at 17%, is the highest in the UK and above the historical norm (13%).
Input and selling prices, and profits growth
After a spike in Q4 2025, input price inflation eased to 3.5% in Q1 2026 and is close to the national average (3.6%). Businesses anticipated that the pace of expansion would continue to slow, predicting growth of 2.7% in the coming 12 months and matching the historical norm. However, oil and gas price rises following the closure of the Strait of Hormuz places greater uncertainty around these expectations.
Companies in the South East have kept their annual price rises stable at 2.3% for the third successive quarter. This is consistent with the UK rate and their plans for next year.
Weak domestic sales growth appears to be feeding into profits growth, with businesses in the region reporting expansion of just 2.5% in Q1 2026, down from the previous quarter and trailing the historical norm (3.3%). Companies expect growth to improve to 4.5% in the year ahead, although this is weaker than most regions and the average projection (5.2%).
Investment
Capital investment continued to recover in the year to Q1 2026, expanding by 1.9% and in line with the historical average. However, the region continues to lag the national average (2.5%) but businesses in the South East plan to increase expenditure to 2.3% in the year ahead, higher than the UK projection (1.9%).
Following a spike last quarter, R&D budgets expanded by 1.8% in Q1 2026, close to the historical norm (1.9%) but weaker than most parts of the UK. Businesses intend to scale back growth to just 1.2% next year, slightly lower than the national projection (1.4%).