Q1: Confidence improved further but remains in negative territory amid the Iran conflict.
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 the West Midlands improved in Q1 2026 but remains in negative territory at -2.9 and below the national average (-1.1).
- Domestic sales growth lagged behind most other regions and while businesses predict strong growth, the exports outlook is weak.
- Both input and selling price inflation softened compared to the previous quarter and further moderation in input cost growth is expected.
- Annual profits growth slowed, though companies in the region anticipate profits growth to improve as cost pressures dissipate over the next 12 months.
- The outlook for capital investment growth remains subdued while businesses plan to curb the above average R&D budget growth next year.
Business confidence in West Midlands
Sentiment in the West Midlands improved for the second consecutive quarter in Q1 2026, however the Business Confidence Index remained in negative territory at -2.9, below both the national average (-1.1) and the region’s historical average (+4.1).
The larger concentration of the export-orientated Manufacturing & Engineering sector in the West Midlands means that businesses in the region are relatively more exposed to the spike in oil and gas prices following the closure of the Strait of Hormuz, while concern over the tax burden and labour costs are significantly more widespread compared to the national average.
Domestic sales and exports growth
Companies in the West Midlands reported that annual domestic sales growth slowed to 2.3% in Q1 2026, lagging significantly behind the national average increase of 3.5%. This subdued increase is likely linked to the muted growth recorded in the locally important Manufacturing & Engineering sector. Companies in the region were optimistic that domestic sales growth would improve in the year ahead, rising to 5.7%, nearly double the region’s historical average (3.1%) and marginally ahead of the national average projection (5.4%).
Meanwhile, businesses in the region recorded an uptick in export sales to 3.3% in Q1 2026, climbing above the region’s historical average (2.5%) and matching the rise reported across the UK as a whole. Companies anticipate that exports will increase at a slower pace of 2.9% over the coming year, one of the softest expansions in the UK, lagging the projected national growth rate of 4.1%. The Middle East conflict has greatly increased the uncertainty around exports growth, particularly if shipping is disrupted longer term.
Business challenges
The increase in employers’ National Insurance Contributions and consecutive rises in minimum wages have put labour costs at the forefront of businesses minds. This was the first time the challenge was included in the survey, and labour costs were the most widespread challenge in the West Midlands, reported by 62% of businesses as a growing concern in Q1 2026, surpassing the UK average (56%).
The tax burden remains a prevalent concern among businesses, with 59% citing tax as a growing challenge over the past year. This proportion was the joint highest in the UK, alongside Wales and Yorkshire & Humberside, at more than three times the regional historical average (18%). Regulatory requirements were also a commonly reported issue, with 48% of businesses reporting them as a growing issue, compared to 47% recorded nationally.
With muted domestic sales growth in Q1 2026, 45% of companies cited customer demand and 37% pointed to competition in the marketplace as growing challenges. Both issues were above their historical norms and more widespread than the national average.
Labour market
Businesses reduced their staff levels by 0.3% over the year to Q1 2026, the only region to report employment decline in the 12 months to Q1 2026. Companies plan to raise their staff levels by 0.9% over the year ahead, though this rise is still marginally below the region’s historical average (1.0%) and the national projection (1.3%).
The employment contraction in the West Midlands is reflected in the proportion of companies reporting labour market challenges in the region. Only 7% of businesses cited the availability of management skills as a growing concern, while 18% reported the availability of non-management skills in Q1 2026, both below their respective historical averages (15% and 20%).
Cooler labour market conditions in the West Midlands equated to a slowdown in annual wage growth in the year to Q1 2026. At 3.1%, wage inflation was weaker than in most other UK regions, just below the UK average of 3.2% year-on-year but still markedly above the regional historical average of 2.1%. Over the coming year, businesses in the region expect to soften salary growth to 2.8%, marginally below the 2.9% forecast across the UK.
Input and selling prices, and profits growth
Annual input price inflation eased significantly in Q1 2026, dropping below the national average (3.6%), to 3.2%, the softest increase of any UK region. Companies expect input price inflation to moderate slightly further over the next 12 months to 3.0%, matching the rise anticipated across the UK, and broadly in line with the region’s historical average (2.9%). However, since the closure of the Strait of Hormuz on 2 March, oil and gas prices have been volatile, representing a major risk to these predictions.
As input cost growth slowed, companies reduced the rate at which they raised their selling prices to 2.0% in the year to Q1 2026, a smaller increase than the 2.3% increase observed nationally. Looking ahead, businesses in the region expect to lift the rate at which they increase their prices marginally over the next year, with a planned increase of 2.2% widening the gap to the regional historical average though still marginally below the national average (2.3%).
Sluggish domestic sales and exports growth translated to muted profits growth in the year to Q1 2026. Profits growth slowed to 2.2%, dropping below the region’s historical average (2.8%) and lower than then the UK average (3.1%). Businesses predict profits to rise at a faster pace next year, with growth of 4.4%, though this expansion is lower than the anticipated UK-wide increase of 5.2%.
Investment
Companies in the West Midlands increased capital investment by just 1.4% in the year to Q1 2026, only outpacing the growth in Scotland (1.1%) and down significantly from the region’s historical average (1.9%). Businesses in the region plan to grow investment at a similar pace over the coming year, with the projected increase of 1.3% among the weakest planned increases in the UK.
In contrast, R&D budgets increased by 2.5% in the year to Q1 2026, the sharpest uplift since Q4 2023 and ahead of the national average expansion of 2.1%. However, businesses in the region intend to reduce budget growth below the region’s historical average (1.8%), though the projected increase of 1.8% is above the 1.4% rise anticipated across the UK.