Q2: Sentiment among companies in the South West deteriorates as the Iran War weighs on the outlook.
The latest national Business Confidence Monitor (BCM) shows that the Iran War significantly dented confidence as it dropped to a near four-year low and suffered its sixth successive negative quarterly score. Companies reported rising costs pressures, weaker expected sales and profits growth for the coming year, while late payment concerns hit a five-year high.
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 13 April to 19 June 2026.
- Business confidence in the South West fell to -18.5 from -6.8 in Q1, below the UK average (-14.6), with geopolitical risk the most widely cited rising challenge.
- Annual domestic sales growth was below the norm and domestic and export sales are both expected to slow markedly in the year ahead.
- Trading conditions are challenging, with customer demand and competition in the marketplace above national averages, while regulatory issues remain prevalent.
- Input price inflation lifted, though it is expected to ease next year, with companies less able to absorb higher costs, they forecast the lowest profits expansion in the UK.
- Salary growth is predicted to ease back to match the historical norm next year as employment demand cools.
- Companies plan to pare back their capital investment, and R&D budget growth is expected to lag all other regions over the coming year.
Business confidence in South West
Business sentiment in the South West fell sharply in Q2 2026, with the Business Confidence Index dropping from -6.8 in Q1 2026 to -18.5. The South West was among the least confident regions in the UK, lagging the national average (-14.6) and marked the fourth consecutive quarter below the region's historical average score (+3.2).
The outbreak of the Iran War towards the end of the first quarter dominated business concerns in Q2 2026. The temporary closure of the Strait of Hormuz drove a sharp rise in energy and oil prices and created supply-chain bottlenecks, with transport problems rising markedly. These shocks have significantly dented the domestic sales and exports outlook for the year ahead, with businesses in the region expecting reduced demand and increased costs to erode their profit margins. However, the US Iran deal has allowed oil and gas prices to ease and businesses in the region are relatively optimistic that input cost pressures will ease markedly over the coming 12 months.
Domestic political instability also grew around the early-May local elections, which brought heavy Labour and Conservative losses to Reform and culminated in the resignation of Sir Keir Starmer as Prime Minister and Labour leader, adding fresh uncertainty for businesses.
Domestic sales and exports growth
Businesses in the South West reported that annual domestic sales growth slowed to 2.2% in Q2 2026, lagging behind the 3.6% rise recorded nationally. Companies are pessimistic about prospects for the year ahead, expecting growth to drop to 1.8%, further below the region’s historical norm (3.1%) and less than half the 4.7% rise forecast nationally.
Annual exports growth lifted in Q2 2026, with growth improving to 3.0%, broadly tracking the 3.1% national rate. However, the increase in global uncertainty since the outbreak of the war in Iran and subsequent spike in oil and gas prices has dented businesses’ exports expectations for the next 12 months, with companies predicting growth will drop below the region’s historical norm (2.8%), to 2.3% in the year ahead. This outlook is among the weakest forecasts in the UK, at just over half the 4.0% rise forecast nationally.
Business challenges
With the Iran War and the closure of the Strait of Hormuz ongoing through much of the survey period, geopolitical risk was reported as a rising challenge by 64% of businesses in the region. Newly added to the survey this quarter, this concern was cited nearly as widely as the national average (65%). With the rise in oil and gas prices, energy costs were reported by almost half (48%) of businesses, although this was the lowest incidence across the UK, and transport problems were reported by over 1 in 5 companies (21%).
Domestic challenges also remain significant, with regulatory requirements recorded as a rising challenge by 52% of businesses in the region, exceeding both the region's historical norm (40%) and the national average (47%). Some of this concern likely relates to the Employment Rights Act and labour costs themselves were widely cited as a rising challenge by businesses in the region (51%).
There is also evidence from BCM that trading conditions remain challenging for businesses in the South West, with prominent concerns reported about both customer demand (46%) and competition in the marketplace (40%). These issues were more prevalent compared to the UK averages (40% and 38% respectively) with the proportion of business reporting competition in the marketplace at its highest level since Q1 2018. Late payments were also cited by a quarter of businesses and above the historical norm (22%). The combined effect of these trading pressures is that businesses appear to be more reluctant to pass on their cost rises to customers.
Labour market
Annual employment growth in the South West was the weakest of any UK region in Q2 2026, at 0.3%, suggesting that companies in the region are still struggling to adapt to the increase in employer National Insurance Contributions and successive minimum wage rises. Jobs expansion was the softest since Q2 2021 and less than a quarter of the region’s historical norm and national average (both 1.4%). Businesses plan to maintain employment growth at a similar pace over the next 12 months, projecting 0.4% growth, significantly lagging the 1.5% rise forecast nationally.
Sluggish employment growth in the region eased pressure on salary inflation, with annual wage growth slowing to 3.0% in Q2 2026, broadly in line with the 3.1% rate recorded nationally. Companies expect the lowest pay inflation of any UK region next year, with salary growth set to moderate to 2.2%, matching the region’s historical norm. Despite a cooling labour market, concern about the availability of non-management skills was reported by 19% of businesses in the region which, while in line with the region's historical norm, was above the 16% recorded across the UK.
Input and selling prices, and profits growth
Annual input price inflation in the South West edged up to 4.1% in Q2 2026, matching the national rate. Companies expect input cost growth will soften to 3.1% in the year ahead, the lowest projected rise of any UK region though still marginally above the region's historical norm (2.9%).
There was further evidence from BCM that amid growing concern over customer demand and competition in the marketplace, businesses in the South West are absorbing some of their input cost rises rather than passing them on to customers. Despite the uptick in input inflation in the quarter, selling price growth in the South West slowed to 2.7% in the year to Q2 2026. Companies plan to reduce growth further over the year ahead to 2.1%, compared to 2.4% nationally but still higher than the historical norm (1.7%).
Businesses reported that annual profits grew by 3.1% in Q2 2026, marginally above the historical average (3.0%) and the national average (2.8%). However, the anticipated slowdown in domestic sales and exports growth over the coming year has dampened the profits outlook for companies in the South West, with a notable slowdown expected over the next 12 months to 2.1%, and less than half the 4.7% rise forecast nationally.
Capital investment and R&D
Companies reported annual capital investment growth of 2.4% in Q2 2026, above the regional historical norm (2.0%) but marginally lagging the 2.7% rate recorded nationally. Turbulent geopolitical conditions in recent months appear to have affected the appetite for capital investment in the South West, with companies planning to cut growth to 0.8% in the year ahead, far below the 1.8% rise forecast nationally.
Businesses in the South West recorded the weakest annual R&D budget growth of any UK region in Q2 2026, at 0.2%, markedly below the national average (2.0%). While companies anticipate a marked uplift over the year ahead, the projected increase of 0.7%, is still lower than the 1.8% rise forecast nationally, and lower than the predicted rate in all other regions.