Business confidence fell in almost all UK nations and regions in Q2 as the fallout from the Iran war continued to wreak havoc on firms, a survey of business leaders, published today, has found.

Businesses in the East Midlands were the most pessimistic, the report found, with confidence plummeting from -11.4 to -22.3 on ICAEW’s Business Confidence Monitor (BCM) index, as the region’s greater dependence on production and logistics left companies more exposed to the volatile global trading environment.

Meanwhile, companies in Scotland (2.1 in Q1 to –21.1 in Q2) and the North West (9.9 in Q1 to –14.3 in Q2) recorded the largest drops in confidence. In Scotland, the Iran War and subsequent closure of the Strait of Hormuz pushed up energy and oil prices, leading to a steeper fall in confidence than the UK-wide decline.

In Wales, confidence fell sharply but domestic sales growth is expected to strengthen in the next 12 months. Labour costs were widely cited as a challenge by Welsh firms.

Only Yorkshire and the Humber recorded a positive confidence reading (2.1) with sentiment now negative in every other nation and region surveyed. Projected increases in domestic sales and exports likely shielded the region from the conflict, the Institute said, though these expectations being realised will hinge on the future US-Iran relations

With the conflict in the Middle East ongoing during the survey period, geopolitical risks were the most-cited challenge to business performance in most parts of the country. They were most prominent in the West Midlands (71%), reflecting the region’s heavy exposure to manufacturing and exports, followed by London (68%) and South East (67%).

Following the closure of the Strait of Hormuz, energy costs were highly reported as a problem area of businesses, particularly in the East Midlands (68%), reflecting its energy-intensive manufacturing and transport sectors.

Of the other challenges, firms in the North East (70%) and Yorkshire and the Humber (66%) said labour costs were a growing challenge, while late payments – at a five-year high nationally – were cited by nearly a third of firms (28%) in Yorkshire and the Humber.

Justin Kyriakou, ICAEW Regional Director for the North West and Acting Director of Regional Engagement, said: “ICAEW members have told us that the difficult macroeconomic environment, including the conflict in Iran and closure of the Strait of Hormuz, created a perfect storm of challenges for British businesses in the quarter.

“Companies in the North West – like most UK regions – reported a sharp fall in confidence in the second quarter, including the weakest yearly exports growth of any UK region, though firms are optimistic that exports and sales will improve next year.

“New Prime Minister Andy Burnham must prioritise cultivating the conditions for companies to thrive and grow, including reducing the complexity, cost and uncertainty that are holding them back.”

Kim Johnston, ICAEW Regional Director for Yorkshire and the Humber, said: “While most regions painted a weak economic picture in the second quarter, Yorkshire and Humber stands out as a region showing resilience – reporting the highest business confidence in the UK. Optimism was driven by projections of healthy sales and exports pipelines, and strong profit forecasts. The region has seen growth in recent years, particularly in the finance and fintech sectors, with Leeds leading the charge as the ‘Northern Square Mile’.

“Although businesses continue to face economic and geopolitical uncertainty, the region's diverse economy, strong pipeline of investment and continued focus on regeneration are helping to support a more positive outlook.”