Iran conflict hits business confidence

The ICAEW’s Business Confidence Monitor shows sentiment has fallen for a fifth consecutive quarter, reversing earlier signs of recovery. Before the conflict, businesses had reported improving domestic sales and easing inflation, but rising geopolitical tensions have sharply dented optimism. Labour costs and energy price volatility remain the biggest pressures on firms.

Business confidence in the UK has fallen sharply since the outbreak of the Iran war amid mounting concerns over sales performance, inflation and energy costs, a survey of 1,000 business leaders published today has found.

Having been on course to move into positive territory for the first time since Q4 2024, average sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) in Q1 fell from +2.8 on the eve of the conflict to an overall reading of -1.1 by the end of the 10-week survey period.

Though confidence improved from the reading of -11.1 in Q4 2025, the impact of the Iran war means sentiment has now been in negative territory for five successive quarters, the longest period in more than six years. Negative confidence readings typically coincide with difficult periods for business, such as the inflation shock that followed Russia’s invasion of Ukraine.

The sizeable shift in confidence likely reflects the easing of uncertainty in the run-up to the Autumn Budget which evaporated overnight as the crisis in the Middle East took hold, reigniting worries over slowing sales, supply chain disruption, inflation and higher energy costs, ICAEW said.

Domestic and export sales expectations for the next 12 months edged down after the war began while selling price inflation expectations for the same period ticked up. One in three (35%) firms cited energy costs as a growing challenge, partly reflecting the conflict in the Middle East, ICAEW said. By sector, worries over energy costs were highest among the largest energy consumers – transportation and storage (44%), energy, water and mining (43%) and retail and wholesale (40%). In contrast, just 20% of financial services firms highlighted this as an issue.

A separate ICAEW survey, published last month, found that a majority of UK businesses felt that support with energy bills would be the most useful thing the government could do to help.

Alan Vallance, ICAEW Chief Executive, said “Businesses have been thrown yet another damaging curveball as they battle to keep their heads above water after a tough few years for the UK economy.

“The UK economy is clearly exposed to instability in the Middle East, and the longer the war lasts the greater the damage from rising energy costs and supply chain disruption.

“Should events in the region continue to escalate, the government must stand ready to provide financial assistance to British businesses so they can weather the storm.

“Even though events in the Middle East continue to dominate, the Chancellor must be careful not to take her eye off the ball at home, with businesses increasingly voicing their concerns over rising labour costs.”

Suren Thiru, ICAEW Chief Economist, said “The first quarter was a tale of two halves for the UK economy as the early-year optimism was dramatically snuffed out as the Middle East conflict refueled fears over skyrocketing cost pressures and wider economic conditions.

“Soaring worries over labour costs underscore the job market’s vulnerability to the fallout from the Iran war as businesses already weakened financially by these outlays will likely seek further savings by cutting hiring as higher energy bills set in.

“Though the impact of the conflict on first quarter growth may be limited, the economic mood is turning increasingly bleak and with projections of future sales already deteriorating and inflation expectations rising, stagflation is a growing danger.”