Confidence among firms remained fragile at the start of 2026, despite some small shoots of recovery, according to the UK’s largest business sentiment survey. The British Chambers of Commerce (BCC) Quarterly Economic Survey also shows labour costs continued to be the biggest cost concern for businesses in Q1, followed by energy.
Going into the Iran conflict, around half (49%) of responding firms said they expected their turnover to improve in the next 12 months. Meanwhile even before recent energy price shocks, 52% of businesses cited utilities as a cost pressure.
Ahead of new employment costs and legislation coming into force for businesses this month, the survey shows 73% of firms cited labour costs as a price pressure.
The survey was carried out by the BCC Insights Unit and the UK-wide Chamber network, largely before the full impact of the Middle East conflict started to be felt. The fieldwork was conducted between 9 February and 9 March. Over 4,500 businesses across the UK (91% of whom are SMEs) responded online.
In over 600 ‘ free text comments’ to the BCC, businesses raised concern over the likely impact of the Iran conflict on energy costs and inflation. They also highlighted domestic cost pressures including minimum wage and employment rights legislation.
Confidence remained fragile before Iran conflict
Business confidence remained fragile at the start of the year, as firms digested the Autumn budget. 49% of responding firms said they expected their turnover to improve in the next 12 months (compared with 46% in Q4 2025). Meanwhile, 31% said they expected no change, and 20% expected a decrease.
Retail and hospitality continue to be the sectors suffering the most. 39% of hospitality firms expected increased turnover, while over a quarter (27%) expected a decrease. 41% of retailers expected improved turnover, while 29% expected a decrease.
Labour and energy costs continue to hit firms
Labour costs continue to be far and away the biggest cost pressure for businesses, cited by 73% of responding firms (the same level as Q4). In the hospitality sector 85% of businesses cite labour as cost pressure. While in transport and logistics the figure is 84%, and manufacturing 78%.
Meanwhile, even before the Iran conflict hit global energy prices, over half (52%) of businesses said utilities were a cost pressure (the same as Q4). The pressure is highest in the hospitality sector (75%) and manufacturing (60%).
Tax remains the biggest concern
Despite concern easing tax remains the biggest worry for business, cited by 54% of firms (down from 63% in Q4). Half of firms (50%) remain concerned about inflation.
Levels of concern about business rates rose in the first few months of the year, ahead of revaluation. 41% of responding firms cited business rates as a concern (the highest level since 2017) up from 34% in Q4.
Investment levels remain in negative territory
With businesses facing a raft of persistent cost pressures, investment levels in plant, machinery and equipment, are stuck in negative territory for the sixth quarter in a row. A quarter (24%) of businesses say they have cut back on investment plans, while 56% say they have remained unchanged, and just 21% of firms increased their plans.
The issue is more marked in certain sectors. A third of hospitality firms (33%) and retail businesses (32%) reported they’d scaled back investment plans.
Sales indicators improved slightly post-Budget
The percentage of responding businesses reporting increased domestic sales rose slightly to 32% (29% in Q4). 42% reported no change, and just over a quarter (26%) said they had seen a decrease in sales. Sectoral breakdowns show increased sales were at their lowest among transport (25%) and manufacturers (26%).
Price rise expectations remained elevated
Even before the likely inflationary impact of the Iran conflict, 49% of responding firms said they were likely to raise prices over the coming quarter (down from 52% in Q1). 47% said their prices were likely to remain the same, and only 3% were expecting to cut prices.
What businesses say:
Middle East conflict
“The instability in the Middle East is a cause for concern, the potential ripple effects from this are our reasons for being concerned about where interest rates, exchange rates, and inflation could go over the coming months.”
Medium sized manufacturing firm in Northern Ireland
“Ongoing impact from food costs remains a challenge, with continued balancing of additional costs for workforce and now planning for impact of future costs from current war in Iran – fuel costs increasing, impacting delivery costs, utilities and general costs”
Medium sized hospitality firm in Greater Birmingham
“If the Middle East conflict is over quickly and doesn’t spread to other parts of the region, I would expect things to pick up, otherwise it is likely to affect energy prices which will have a knock-on effect on market demand.”
Micro-public sector firm in the West of England
General business environment
“Labour costs are constantly increasing, SSP as well as NMW increases continue to push up our costs well above inflation.”
Large professional services firm in the Black Country
“The uncertainty of the business rates increase is the biggest concern and impacting our decision to move to larger offices to support more staff.”
Micro professional services firm in Surrey
“UK Government policy on taxation and other business-related costs is causing considerable stress and uncertainty for business owners, especially SMEs. A policy shift will be required to stimulate survival let alone growth.”
Small professional services firm in Scotland
David Bharier, Head of Research at the British Chambers of Commerce said:
“Even before the latest escalation in the Middle East, business sentiment remained fragile and stuck in a low-growth phase.
“Most SMEs continue to report no improvement in key indicators such as investment and cash flow. Sentiment remains largely unchanged since the 2024 Budget, which saw a permanent increase in the labour cost base for firms.
“Businesses face a fresh wave of employer costs and burdens from this month, causing further pressure and uncertainty.
“But the Iran conflict is now the major factor that could derail fragile progress. We are already seeing early impacts, with firms reporting rising energy and shipping costs, echoing the initial stages of previous global shocks.
“De-escalation is the only way to prevent a deeper economic crisis. As energy costs rise the government should keep all options on the table to help businesses. Bringing forward and extending the scope of the BICS (British Industrial Competitiveness Scheme) would be a strong step, alongside reconsidering how renewable levies on business energy bills are paid.
“In the longer term, breaking out of this low-momentum cycle will require delivering the industrial strategy, boosting and diversifying our exports, and the broader adoption of AI to drive productivity.”