Q1: Confidence improves but remains in negative territory in Q1 2026 as Iran war raises 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.
- Business confidence in Wales improved in Q1 2026 but remains in negative territory at -3.7 and below the national average (-1.1).
- Domestic sales and exports growth improved and, while domestic sales are expected to improve further, companies project a slowdown in exports growth.
- Annual input price inflation eased but the Middle East conflict is likely to dampen the predicted moderation to cost pressures in the year ahead.
- Regulatory requirements and the tax burden remained the most widespread growing challenges for Welsh companies, with labour and energy costs also prevalent.
- Salary inflation ticked up for the third consecutive quarter but is anticipated to slow as employment growth cools.
- Capital investment growth ticked up in Q1 2026 but expansion is expected to stall, with businesses also planning to cut R&D budgets.
Business confidence in Wales
Sentiment in Wales improved marginally in Q1 2026 but remains in negative territory, with national weekly survey data indicating a fall in confidence following the outbreak of the Iran war. Overall, the Business Confidence Index increased from -7.8 in the previous quarter to -3.7 but below both the UK average (-1.1) and the region’s historical average (+2.7).
UK sentiment improved early in Q1 2026 as post–Budget uncertainty eased and firms adapted to last year’s changes to employers’ National Insurance Contributions. The government also boosted investment in Wales, pledging an additional £505m over four years, with a particular focus on moving Port Talbot away from its reliance on the Tata Steel Works and designating it the Celtic Sea’s first port specifically developed for floating offshore wind ‒ a key step toward the clean power mission. However, the conflict in the Middle East led to increased fuel prices from late February and a rise in global uncertainty, presenting a significant risk to the outlook for Welsh businesses.
Domestic sales and exports growth
Annual domestic sales growth in Wales improved to 3.6% in Q1 2026, the largest increase since Q2 2024, outpacing the regional historical (3.0%) and national averages (3.5%). This uptick in growth is likely linked to the uplift observed by businesses in the Manufacturing & Engineering sector, a key source of economic output in Wales. Looking ahead, Welsh businesses expect domestic sales growth will improve further, rising to 4.7%, however, this estimate is lower than the national average projection (5.4%) and is among the softest forecasts in the UK.
Welsh businesses reported that annual exports growth improved to 2.7% in the year to Q1 2026, equalling the region’s historical average (2.7%). However, this outturn was lower than the national average of 3.3% and companies expect exports growth will soften over the coming year. The projected rise of 2.5% is the weakest of any region and below the rise anticipated across the UK (4.1%). The Middle East conflict has greatly increased the uncertainty around exports growth, particularly if shipping is disrupted longer term.
Input and selling prices, and profits growth
After remaining stable at 4.1% for three consecutive quarters, Welsh businesses reported that annual input price inflation eased to 3.7% y/y in Q1 2026. This is the softest rise since Q4 2023 and broadly in line with the UK average (3.6%). Companies anticipate that input cost inflation will moderate further and close the gap to the historical average (2.8%), with an increase of 3.1% expected over the next 12 months ‒ similar to the national average projection (3.0%). However, since the closure of the Strait of Hormuz on 2 March, oil and gas prices have spiked, representing a major risk to these predictions.
Businesses in Wales increased the rate at which they raised their selling prices to 3.8% in the year to Q1 2026, the sharpest increase of any region and more than double the region’s historical average (1.6%). Over the coming year, companies plan to moderate the rate at which they increase their selling prices to 3.1%, though this projected increase is still the largest anticipated rise of any UK region, significantly above the 2.3% expected nationally.
Uplifts in domestic and export sales growth and softer annual input price inflation translated into increased profits growth in Wales, with businesses reporting that growth improved to 3.2% in Q1 2026, climbing above both the national (3.1%) and historical average (2.5%). Welsh companies anticipate further profits growth improvements over the next 12 months, with a projected rise of 5.3%, over double the region’s historical average and marginally ahead of the UK projection (5.2%).
Labour market
Businesses in Wales reported that annual employment picked up considerably from the previous quarter, reaching 1.1%, matching the national average and just short of the region’s historical average (1.2%). This increase potentially suggests that companies in the region have been able to adjust their hiring strategies to cope with the increased labour costs associated with the rise in National Living Wage and employers’ National Insurance Contributions in April 2025. However, companies plan to reduce employment growth to just 0.6% in the year ahead, less than half the national average projection of 1.3%.
Like other regions, the slowdown in employment growth in Wales over recent quarters continues to be reflected in the proportion of businesses citing labour market challenges in the region. Only 7% of businesses reported the availability of management skills as a growing concern, while 13% cited the availability of non-management skills in Q1 2026, both significantly down on their respective historical averages (16% and 20%).
The uptick in employment growth was accompanied by an increase in annual wage inflation in the year to Q1 2026, to 3.6%. This growth was nearly double the region’s historical norm (2.1%) and only lower than the increase reported in Scotland. With the demand for labour set to soften over the coming year, companies in the region predict that annual wage inflation will ease to 2.8%, dropping marginally below the 2.9% rise forecast nationally.
Business challenges
The Employment Rights Act will be phased in this year, adding new compliance pressures for employers. Against this backdrop, 60% of Welsh companies say regulatory requirements have become more challenging to their performance, matching the historical high. Given its sectoral mix, Wales appears to be more exposed to the changes in legislation due to its larger reliance on labour intensive industries and reported the highest level of concern of any region, well above the UK average of 47%. Tax pressures remain evident, with 59% of Welsh businesses citing the tax burden as a rising challenge in Q1 2026, down from last quarter (69%) but nearly three times the region’s historical average (19%) and joint-highest in the UK alongside the West Midlands and Yorkshire & Humberside.
Over half (53%) of Welsh businesses cited labour costs as a rising challenge in Q1 2026. This was the first time the challenge was included in the survey, and the prevalence of this challenge is likely linked to last year’s uplift in employers’ National Insurance Contributions, the consecutive rises in the National Living Wage in 2025 and 2026 and the uncertainty surrounding potential additional costs associated with the Employment Rights Act.
Businesses were also asked about energy costs for the first time, with 39% reporting the issue as a growing challenge. Energy costs are likely to become a more prevalent concern in the months ahead due to the spike in oil and gas prices following the closure of the Strait of Hormuz on 2 March.
Investment
Alongside greater government investment in Wales, businesses also increased their capital investment in the region by 2.9% in the year to Q1 2026, exceeding both the region’s historical (1.9%) and the national averages (2.5%). However, this comparatively strong pace will not be sustained, with businesses in the region planning to keep their investment at its current level (0.0%) over the coming year, the weakest outlook of any UK region.
Businesses in Wales recorded one of the weakest increases in R&D budgets of any UK region in the year to Q1 2026. The reported growth of 1.4% was only ahead of the increase recorded in the North West (1.2%) and Wales is the only part of the UK where businesses are planning to cut R&D budgets in the coming year, with companies anticipating a 0.4% fall.
The downbeat investment view could be linked to the high proportion of businesses that are operating below capacity in Wales. Two thirds (66%) of companies said they have spare capacity compared to 50% across the UK.