UK Business Confidence Monitor: National

1. Business sentiment turned negative for the first time in over two years, falling to -3.0, the lowest reading since Q4 2022. Higher business taxes alongside weak UK economic growth and increased global uncertainty related to US tariffs have further dented confidence.
2. Concern about the tax burden reached unprecedented levels across all sectors and likely underpins the weakening employment growth picture reported in Q1 2025.
3. Inflationary pressure is another likely concern, as input prices picked up for the first time since Q2 2023, and companies have lifted their expectations. Many businesses have also uplifted their projections for wages growth, further dampening profits growth expectations.
4. Domestic sales and exports growth are hovering around the historical average, and while companies continue to expect growth to pick up, they have lowered their expectations for domestic sales.
5. Confidence varied significantly across sectors in Q1 2025 but was down in most. The Manufacturing & Engineering sector was the most pessimistic after confidence slipped into deep negative territory, alongside Transport & Storage, Retail & Wholesale and Property, while sentiment improved in IT & Communications, Construction and Energy, Water & Mining.

• The Business Confidence Index contracted further in Q1 2025, falling into negative territory for the first time since Q4 2022 as concern about the tax burden reaches unprecedented highs.
• Domestic sales growth picked up slightly, and while businesses expect sales to improve further, they have lowered their expectations for the year ahead. Exports sales growth has been steady but continues to lag the historic average.
• Sentiment varied widely across sectors. Confidence scores in Manufacturing & Engineering, Property and Retail & Wholesale are in negative territory, while sentiment in IT & Communications, Construction and Energy, Water & Mining improved.

Confidence dropped again in Q1 2025, with the Business Confidence Index recorded at -3.0, the first time a negative score has been recorded since Q4 2022, and the second consecutive quarter that the index lagged the historical average (+5.1). Business sentiment rose in the first half of 2024 as economic growth accelerated and a change in the UK Government brought an end to a period of political uncertainty. However, confidence has since ebbed away following the tax rises announced in the autumn Budget, weak economic growth and the recent increase in global uncertainty linked to US global trade policy and tariffs. Concerns about the tax burden reached unprecedented highs and are the primary business concern across most sectors.

Despite growing headwinds, businesses reported that annual domestic sales growth improved slightly in Q1 2025, rising to 3.4% from 3.2% the previous quarter and ahead of the historical norm (3.1%). Exports sales growth also remained steady, with growth maintained at 2.8%, matching growth recorded in Q4 2024. Across recent quarters, businesses have been adjusting their expectations for annual domestic sales growth, and this was again the case in Q1 2025. Companies now expect domestic sales growth to improve to 4.6% in the year ahead, down from the 4.9% reported in the last quarter and the lowest growth projections since Q1 2023. Businesses maintained their view that exports growth will rise to 4.0% over the next 12 months, above the historical average of 3.0%. However, the survey was taken before companies could factor in the potential impact of the worldwide tariffs introduced by the US administration on 5 April.

Confidence varied greatly across sectors in Q1 2025. The increasingly uncertain domestic and global outlook is understandably weighing heavily on the Manufacturing & Engineering sector, which recorded a sharp fall in sentiment and, with a score of -11.1, is the least confident sector. Close behind is Property (-10.3), with the weak housing market and depressed demand for commercial real estate likely impacting sentiment in the sector. Confidence in Retail & Wholesale (-8.4) dipped further into negative territory as consumer confidence remains weak and cost pressures in the sector build. Transport & Storage was the other sector returning a negative score (-6.4).

Meanwhile, confidence improved in IT & Communications (+10.0), and it is now the most confident sector, ahead of Construction (+7.8) and Energy, Water & Mining (+6.9), which also recorded improved sentiment in Q1 2025. The Construction sector is the most buoyant compared to its historical norm (+3.8), and this is likely linked to the government reiterating its house building targets and commitments to planning reform.

• The tax burden is the most widespread growing challenge for businesses for the second quarter in a row, reaching unprecedented highs across all sectors.
• Regulatory requirements are the second most prevalent rising challenge for businesses and edged above the historical average, despite government commitments to ease the regulatory burden.
• Concerns about customer demand are most prevalent in Manufacturing & Engineering, Retail & Wholesale and IT & Communications. The latter two sectors are also most concerned about competition in the marketplace.

The tax burden was reported as a growing challenge by 56% of businesses in Q1 2025, a new record high for the survey and a significant increase from the previous record high of 41% in Q4 2024. Concern has been on a rising trend over the last four years, growing from a reading of just 8% in Q1 2021. Following the tax rises announced in the autumn Budget, the concern is now at historical survey highs in every sector. It was reported by 72% of Construction and 66% of Property businesses and while Business services (46%) and IT & Communications (50%) were least likely to report the issue, it was the most prevalent concern in every sector bar Banking, Finance & Insurance (58%), for which regulatory requirements were most pressing.

Regulatory requirements were the next most prominent challenge for business performance, reported by 43% of businesses, with the proportion edging up from the previous quarter and ahead of the historical norm (40%). This comes despite government commitments to ease the regulatory burden on businesses. Alongside the highly regulated Banking, Finance & Insurance sector (59%), a larger proportion of Property businesses (55%) cited the issue amid ongoing uncertainty about the Renters’ Rights Bill. Concern about regulation was equal to or above the historical norm for six of the nine sectors surveyed.

Despite steady domestic sales and exports growth, over a third (35%) of businesses surveyed reported customer demand as a growing challenge in Q1 2025. Manufacturing & Engineering companies were most likely to report the issue (46%), perhaps unsurprising given relatively weak domestic demand and challenging export markets. Similarly, 44% of Retailers & Wholesalers cited concern amid weak consumer spending and price-sensitive consumers. While ONS reported retail sales growth in January and February 2025, the growth in sales volumes is from a low base. IT & Communications (43%) businesses were also more likely to report customer demand as a growing challenge, and this could be linked to reports that businesses are seeking to cut back on discretionary spending amid rising business costs.

The Retail & Wholesale (46%) and IT & Communications (43%) sectors also reported the greatest concern about competition in the marketplace. For the former, it is a reflection on the competition for customers in an environment of weak consumer confidence and rising prices. For the latter, it may be symptomatic of the success the sector has enjoyed in the post-pandemic period amid some signs of weakening demand.

• Annual input price inflation picked up for the first time since Q2 2023 and businesses have raised projections for the next 12 months.
• Despite rising cost pressures, selling price inflation slowed to its lowest level since Q4 2021 in the 12 months to Q1 2025 but is expected to ease only slightly further in the year ahead.
• All sectors anticipate that input price inflation will continue to ease over the coming year, but Transport & Storage and Energy, Water & Mining predict marked increases in selling prices compared to the past 12 months.

After easing in each of the last six quarters, annual input price inflation ticked up in Q1 2025, rising to 3.9% from 3.7% last quarter. There is likely to be further upward pressure on input costs as the year progresses, including the 6.4% rise in the OFGEM energy price cap in April. While businesses still expect input price inflation will moderate further over the coming year, they have raised their projections from 2.7% in Q4 2024 to 3.0% in Q1 2025, further above the historical average (2.6%).

Most sectors reported an uplift in input price growth in the year to Q1 2025, with the largest uplifts in the IT & Communications (4.5%) and the Energy, Water & Mining (4.4%) sectors. The Banking, Finance & Insurance and Construction sectors were exceptions to this trend, with the former recording the smallest rise in input costs in Q1 2025, at just 2.9%. All sectors expect input price inflation will soften further in the year ahead, with the Banking, Finance, & Insurance sector projecting the smallest increase at just 2.1%. Companies in the IT & Communications, Transport & Storage and Business Services sectors all expect input prices will rise by 3.4% over the next 12 months, outpacing their respective historical averages.

Despite the uptick in annual input price inflation, UK businesses continued to ease the rate at which they increased their selling prices to 2.2% in the year to Q1 2025. Companies plan to ease selling price inflation to 2.1% in the year ahead, with cost pressures likely limiting the scope for larger adjustments.

Companies in the Business Services and Property sectors recorded larger selling price increases than all other sectors in the UK economy in the year Q1 2025, at 2.8%, more than double their respective historical averages. January’s uplift in the OFGEM energy price cap saw selling prices in the Energy, Water, & Mining sector return to growth in Q1 2025. However, at just 1.4%, this was among the weakest annual rises of any UK sector. April’s rise in the energy price cap will allow some companies in the sector to increase their selling prices further over the next 12 months, with companies projecting a 2.6% rise, only lower than the Transport & Storage sector (3.2%).

After recording the lowest selling price increase of any sector in the year to Q1 2025, at just 1.2%, businesses in the Banking, Finance & Insurance sector are planning to ease growth further over the next year to 0.9%, only marginally above the sector’s historical average (0.7%).

• Annual employment growth continued to slow in Q1 2025, dropping below the historical average for the first time in nearly four years. A modest increase in growth is anticipated for the year ahead.
• The employment outlook varies between sectors. Construction companies expect the strongest employment growth, while Transport & Storage, Property and Retail & Wholesale companies all expect only modest increases over the next 12 months.
• Annual salary growth was unchanged from the previous quarter in Q1 2025, and while companies expect wage inflation will ease slightly over the coming year, the projected rate of increase is high compared to the historical average.

There is further evidence from the survey that employment demand is cooling, with the rise in employment costs, the softening economic outlook and greater uncertainty leading companies to either delay or cancel new recruitment. Businesses reduced the rate at which they increased their staff levels in Q1 2025, with annual growth of just 1.2%, the weakest performance since employment declined in Q2 2021.

There was notable variation between sectors, with employment contracting by 0.6% year-on-year in the IT and Communications sector, the weakest outturn since Q2 2010 as domestic sales demand in the sector eased after a sustained period of above-average growth. At the other end of the scale, the Business Services and Energy, Water & Mining sectors recorded the largest employment increases in the year to Q1 2025, at 2.4% and 2.3% respectively, approximately double the national average.

A modest uplift is anticipated over the coming year, with UK companies planning on raising their staff levels by 1.5%, the softest projected increase since Q4 2020. Some of the slowdown in employment growth can be attributed to April’s 6.7% increase in the National Living Wage, the uplift in National Insurance Contributions and the forthcoming Employment Rights Bill. The culmination of all these factors, alongside growing uncertainty, has dampened the demand for labour in the Transport & Storage, Property and Retail & Wholesale sectors. Over the next year, companies in these sectors anticipate the smallest increase in their staffing levels, with growth of just 0.7%. Meanwhile, the government’s house building targets are likely fuelling expectations in the labour-intensive Construction sector. Businesses in the sector predict a growth of 3.0% over the next 12 months, the strongest uptick in expansion of any sector and nearly three times the sector’s historical average (1.2%).

As labour demand has cooled, the proportion of companies citing the availability of non-management skills as a growing concern has declined further, dropping to 17%, below the historical average (18%). However, there was an increase in concern in Manufacturing & Engineering and Transport & Storage, with more than one in four companies in these sectors reporting the issue as a rising challenge in Q1 2025. Meanwhile, growth in staff training budgets also eased to 1.1% in the year to Q1 2025, the softest expansion since Q3 2021.

Salary inflation overall remained unchanged from the previous quarter at 3.1% year-on-year in Q1 2025. The Energy, Water, & Mining sector recorded the largest uplift of any sector at 3.9%, closely followed by the Construction sector (3.8%). Most sectors expect salary growth to either remain unchanged or soften over the next 12 months. However, both the Retail & Wholesale and Manufacturing & Engineering sectors, which tend to employ larger proportions of workers in lower paid roles, are expecting salary inflation to pick up over the coming year to 3.0% and 2.9% respectively.

• Profits growth softened in the year Q1 2025, dropping below the historical average. Businesses have reduced their expectations for the next 12 months but still project a significant uplift in the coming year.
• Annual capital investment growth was unchanged in Q1 2025, and companies plan to reduce the rate at which they increase their expenditure over the next 12 months. R&D budget expansion eased further, and businesses’ projected growth will remain the same over the next year.
• Transport & Storage reported the sharpest rise in capital investment growth over the past year. Over the next year, capital expenditure is expected to be strongest in Banking, Finance and Insurance, and weakest in Retail & Wholesale.

The upticks in input price and salary inflation resulted in annual profits growth easing to 2.7% in Q1 2025 from 3.3% in Q4 2024. Similar to their outlook on domestic sales, businesses have been lowering their expectations for future profits growth in successive quarters. Companies continue to expect profits growth to improve over the next 12 months, but they now anticipate growth of 4.7% compared to 5.0% projected last quarter.

With profits growth expectations weakening, the investment outlook is more subdued. Even after February’s cut in interest rates, borrowing costs remain high and elevated levels of uncertainty are likely driving concerns about the possible return on investment. As a result, capital investment growth was unchanged in the year to Q1 2025 compared to the previous quarter at 2.6%, and companies plan to reduce the rate at which they increase their capital investment to just 1.8% over the coming year, dipping below the historical average of 2.1%.

Businesses have comparable expectations for their R&D budgets. Annual budgets growth eased for the fourth consecutive quarter in Q1 2025, dropping further below the historical average (1.9%) to 1.5%. Companies plan on maintaining growth at 1.5% over the next 12 months.

At a sectoral level, changes in the EU's Entry/Exit System (EES) alongside increased activity in the air transport sector over the past year facilitated capital investment expenditure growth of 3.8% year-on-year in the Transport & Storage sector. The investment picture is muted across all sectors as they expect to reduce their capital investment growth in the next 12 months. IT & Communications is an exception with a planned marginal uplift to 1.6%. Investment growth will be strongest in the Banking, Finance, & Insurance sector (2.5%) and weakest in the Retail & Wholesale sector (1.0%).

• Confidence varied significantly across sectors in Q1 2025 but was down in most.
• The Manufacturing & Engineering sector was the most pessimistic after confidence slipped into deep negative territory, alongside Transport & Storage, Retail & Wholesale and Property, while sentiment improved in IT & Communications, Construction and Energy, Water & Mining.
• Following recent rises in most sectors, input price inflation is projected to continue to ease over the next 12 months. The Banking, Finance & Insurance sector expects the lowest input price growth and the softest rise in selling prices for the coming year.

The tax rises announced in the autumn Budget, a weak domestic economy and rising global uncertainty caused by the US global trade policy and tariffs have all been contributing factors in confidence declining in most sectors surveyed in Q1 2025. Manufacturing & Engineering companies have been particularly exposed to each of these headwinds, and confidence in the sector slipped into negative territory, to -11.1. Similar declines were recorded in Transport & Storage (-6.4), Retail & Wholesale (-8.4) and Property (-10.3).

Growing uncertainty and a weak housing market are likely weighing on sentiment in the Property sector and, like many sectors, rising cost inflation and wages have eroded annual profits growth in Q1 2025, which expanded by just 1.2%, down from 2.4% the previous quarter. Companies in the sector reported relatively weak domestic sales growth expectations of 3.3% for the year ahead, the lowest projection across all sectors. Retail & Wholesale businesses report ongoing weak consumer spending and intense competition in the marketplace. Retailers have been particularly vocal about the expected cost impact of April’s National Living Wage and National Insurance Contribution rises. Meanwhile, Transport & Storage businesses reported weak profits growth of just 1.1% in the year to Q1 2025, with companies likely concerned that weakening economic conditions will suppress demand in the sector. They have the second-lowest domestic sales projection for the coming 12 months, at 3.5%.

However, confidence rose in some sectors. The continued rise in demand for AI has bolstered confidence in the IT & Communications sector, which climbed to +10.0 in Q1 2025. Companies in the sector expect to outpace all other sectors this year, with domestic sales growth of 7.2% and exports growth of 5.2%. These uplifts in sales alongside easing input price inflation should support an increase in profits growth over the next 12 months, with a growth of 7.2% projected.

Meanwhile, the government reiterated its house building targets and commitments to planning reform, alongside sustained domestic sales growth of 4.3% over the past 12 months, which undoubtedly fuelled the optimism in the Construction sector, as confidence rose to +7.8. However, the labour-intensive nature of the sector does leave it exposed to April’s increase in National Living Wage and National Insurance Contributions, reflected in 72% of businesses in the sector citing the tax burden as a growing challenge in Q1 2025.

Most sectors reported an uptick in annual input price inflation in Q1 2025 compared to the previous quarter, with the IT & Communications and Energy, Water & Mining sectors reporting input price rises of 4.5% and 4.4%, respectively. However, despite this uptick, all sectors foresee that the slowdown in inflation will resume over the next 12 months. Businesses in the Banking, Finance, & Insurance sector expect the lowest input price rises over the coming year, with a projected increase of just 2.1%. Easing input cost pressures will equate to softer selling price rises in the year for the sector with a growth of just 0.9% forecast for the year ahead.

• Business confidence declined in most regions, with the majority falling further into negative territory.
• Wales and the East Midlands were the most pessimistic. Scotland’s businesses remain the most optimistic in the UK despite a modest decline from the previous quarter.

Sentiment deteriorated in most regions in the UK in Q1 2025, and most regions fell deeper into negative territory. Businesses in Wales were the most pessimistic of all UK regions in Q1 2025, with the Business Confidence Index for the region dropping to -17.6. The increasingly turbulent global trading environment has resulted in a further contraction in sentiment in the East Midlands. The region's larger dependence on production has left businesses exposed to tariffs and weakened global demand, with confidence dropping to -13.2 in Q1 2025.

Meanwhile, despite a small contraction from Q4 2024, businesses in Scotland continued to be the most optimistic in the UK, at +10.4 in Q1 2025, with significant activity in the Energy, Water & Mining sector likely underpinning sentiment in the region.

Further analysis of confidence for each region and nation is available in their respective reports on ICAEW Business Confidence Monitor.

• Sentiment is varied across company types. Listed companies were the most optimistic.

Weakening domestic demand following the autumn Budget is likely underpinning concerns for businesses in the UK. Companies listed outside the UK were the most confident of all business types in Q1 2025, as the Business Confidence Index rose to +5.7. Confidence deteriorated further in Non-Exporters to -7.4.and, while there was a notable decline compared to Q4 2024, sentiment among Exporters remained positive at +1.4. However, US tariffs will likely pose significant downside risks to the outlook for these businesses.

• The start of 2025 has been met with increased international economic uncertainty as the US introduced new tariffs which will impact global trade.
• Economic data for the start of 2025 has been mixed following a weak end to 2024.
• Inflationary pressures have re-emerged, and regulated price increases and higher labour costs linked to the Autumn Budget are set to push inflation higher later this year.

The first quarter of 2025 has been met with increased global economic uncertainty, mainly linked to the change in trade policy of the new US administration. Various announcements about US tariffs were made throughout February and March, culminating in the introduction of worldwide tariffs on 5 April, establishing a 10% minimum on all countries, although some will be much higher. The UK tariff is 10%, but there are exceptions, and all cars manufactured outside of the US are subject to a 25% tariff.

The UK economy is estimated to have grown by 1.1% in 2024, with most of the growth coming at the start of the year as momentum ebbed away in the second half of the year. In the Spring Statement in March, the Chancellor of the Exchequer stated that the Office for Budget Responsibility revised down the UK’s growth forecast for 2025 to 1%, down from 2% in the autumn. So far data for the start of 2025 has been mixed, with monthly GDP figures suggesting that after failing to grow in January, the UK economy recorded higher-than-expected growth of 0.5% in February month-on-month, with the biggest gains coming from manufacturing, information & communication and electricity, gas, steam and air conditioning supply.

Meanwhile, after rising to 3.0% in January, CPI inflation softened to 2.8% in February. However, regulated price rises and higher labour costs are set to push inflation materially higher later this year. The Ofgem energy price cap rose by 1.2% on 1 January 2025, with the regulator announcing a further increase of 6.4% in April 2025. The Monetary Policy Committee voted to lower the Bank Rate from 4.75% to 4.5% in February’s meeting and is expected to continue to follow a cut-and-hold strategy, waiting to see the impact of rate cuts until voting for further cuts.

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