Business confidence has dropped to its weakest level since early 2021, according to advisory firm BDO, as persistent inflation and subdued consumer demand continue to challenge the UK economy. The latest Optimism Index, which surveyed more than 4,000 executives, shows sentiment sliding to levels last recorded during the early stages of the pandemic.
The findings underline mounting caution among business leaders as the Labour government faces pressure to support growth. BDO’s data suggests that weaker confidence could translate into reduced capital spending and slower job creation in the coming months, with businesses reporting difficulties planning long-term amid volatile market conditions.
Scott Knight, Head of Growth at BDO, described the current mood as “on the floor.” He added: “Decisive action like further interest rate cuts and a clear roadmap for the future is critical if businesses are to grow and invest.”
Although inflation has eased from its recent highs, BDO warned that cost pressures remain elevated and continue to erode margins, particularly in manufacturing and services. The firm said that businesses face a “toxic mix” of uncertainty, rising tax burdens, and complex regulation that threaten to stifle recovery.
Kenny MacAulay, CEO of Acting Office, an accounting software platform, said: “A toxic mix of economic uncertainty alongside increased hiring costs is leaving business leaders cautious about 2026. The UK’s increasing tax burden alongside ever-complex regulations means that navigating the road ahead comes with increased risk. Key to kickstarting growth is for the government to send a clear signal that it recognises the contributions made by businesses to the economy and provide support and incentives for new hires to take place.”
Despite weak sentiment, some analysts point to small areas of resilience. BDO’s Output Index showed a marginal uptick as new orders rose toward the end of the year, though the manufacturing sector remains under pressure. Other recent surveys, including those from the Institute of Directors and S&P Global, also indicate that many companies are focusing on technology investment rather than expanding their workforce.
Sachin Agrawal, Managing Director for Zoho UK, said that the most adaptable businesses are those already investing in digital infrastructure: “Rising costs, increasing regulatory pressures, and uncertainty around future demand are making it harder for businesses to plan long-term with confidence, so during these periods, businesses should prioritise creating stability and trust, including with partners, customers, employees, and other stakeholders.
“The most agile, flexible and adaptable businesses are often the ones who are most advanced in digitisation. However, for true resilience, businesses must closely examine their strategy and ensure they have the right leadership style, the right culture as well as the right tools to weather any storm.”
Agrawal added that investment in technology — particularly in data and AI — can provide “real-time and future-looking insights to determine opportunities and threats” and strengthen long-term resilience against wavering market confidence.
As the UK enters 2026, BDO warns that a sustained recovery in sentiment will depend on greater macroeconomic stability and clear, long-term policy direction from government and the Bank of England.
