Q1: Business confidence drops further into negative territory in Wales.
The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions, and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 10 February to 27 March 2025.
- Confidence in Wales fell deeper into negative territory in Q1 2025, falling to -17.6, significantly below the UK average of -3.0 and the weakest score in the UK.
- Domestic sales growth lagged all other parts of the UK, and businesses in Wales have the weakest growth expectations of any region over the coming year. Exports growth is also projected to lag the UK average.
- The tax burden is now the main business concern in Wales, with the highest proportion of companies on record citing the issue.
- Businesses in Wales reported the largest rise in annual input cost inflation in the UK, and this is projected to continue over the coming year.
- Employment growth in Wales experienced a modest pick-up in Q1 2025 but remains sluggish.
- Companies in Wales plan to cut the rate at which they increase capital investment next year, while R&D budgets are set to decline.
Business confidence in Wales
Sentiment in Wales continued to fall deeper into negative territory in Q1 2025. The Business Confidence Index declined from -12.1 in the previous quarter to -17.6, its lowest score since Q3 2022 and significantly below the historical average (+3.0). The drop means that sentiment in Wales is well below the UK average (-3.0) and is the least confident part of the UK.
The increased pessimism is underpinned by growing uncertainty in the global economy as well as poor domestic sales and exports growth in the past 12 months. News that Tata Steel’s electric furnace was approved in February may have provided some certainty to the future of steel production in Wales, but the closure of the blast furnaces in Port Talbot that led to around 2,500 job losses in south Wales will continue to weigh on confidence. The political backdrop in Wales is also increasingly uncertain with the polling between the four main parties close ahead of the Welsh General Election next year.
Domestic sales and exports growth
Annual domestic sales growth in Wales slowed to 2.0% in Q1 2025, the lowest increase since Q2 2021 and the weakest in the UK. This subdued growth is likely linked to the sluggish expansion observed by businesses in the Manufacturing & Engineering sector, a key source of economic output in Wales. Looking ahead, Welsh businesses project a modest improvement in domestic sales growth over the next 12 months, to 2.6%, however, this estimate is still the weakest in the UK and lags the historical average (3.1%).
Annual exports growth also eased to just 1.0%, the weakest expansion in four years. This rate is nearly three times below both the historical and national averages (2.8%) and, despite anticipating an improvement in exports growth over the coming year, Wales is set to continue to lag the national average (4.0%), with a projected rise of 3.2%.
Input and selling prices, and profits growth
Welsh companies reported that input cost inflation eased slightly in Q1 2025, however, this was still the largest input price growth of any UK region, at 4.5%. Further moderation is anticipated in the year ahead, however, at 3.7%, input price inflation will remain above the region’s historical average (2.7%) and higher than projections for all other parts of the UK. The disruption caused by US tariffs on the UK could add further upward inflationary pressure on businesses' costs.
Annual selling price inflation remained unchanged from the previous quarter in Q1 2025, rising by 2.9%. This growth is nearly double the historical average of 1.5% and among the largest price rises in the UK, only behind the East Midlands (3.5%). With expected input price growth set to remain above average over the coming year, companies in the region plan to pass at least some of the increase in cost burden onto their customers. They have uplifted their projected growth in selling prices and now plan to raise their selling prices to 2.8% next year, notably above the national average (2.1%).
High input cost growth alongside weak domestic and export sales growth has equated to only a modest expansion in profits of 0.4% in the year to Q1 2025. This marginal increase is significantly below both the historical (2.5%) and national averages (2.7%) and only stronger than reported in the East Midlands and Scotland. While Welsh businesses expect a marked uptick in profits growth in the year ahead, the anticipated expansion of 3.1% is significantly lower than the projected national average of 4.7% and all other parts of the UK.
Labour market
Annual employment growth experienced a marginal pick up in Q1 2025, as businesses in Wales increased their staffing levels by 0.8%. Despite this uplift, growth was still below the increase of 1.2% recorded across the UK. Welsh companies expect further improvements over the year ahead, with employment growth projected to rise to 1.8% over the next 12 months, notably above the region’s historical average (1.2%) and stronger than the 1.5% expansion expected nationally. Strong growth among Construction businesses and parts of the services sector could be driving the relatively strong employment outlook.
Salaries in the region rose by 2.9% in the year to Q1 2025, marking an increase compared to historical norms. Looking ahead, companies expect wages to grow at a similar pace, with a projected increase of 2.8% over the coming year. However, this is still marginally below the current national average (3.1%), as well as the projected UK average for the year (2.9%).
Business challenges
Welsh businesses are increasingly concerned about how tax rises and increases in the National Living Wage announced in the UK autumn Budget will affect their businesses. The tax burden became the most prevalent challenge in Wales in Q1 2025, with 53% of companies in the region citing it as a rising challenge, a survey record high at over three times the historical average (17%).
Despite the UK Government’s commitment to cut the regulatory burden for businesses, these challenges are more widespread in Wales than in almost all other parts of the UK. Regulatory requirements were cited as a rising challenge by 48% of businesses in Q1 2025, notably above the historical average of 39%.
Investment
Companies in Wales reported a modest uplift in capital investment growth, with an increase of 1.9% year-on-year, matching the historical average. However, despite this slight improvement, Wales still lagged significantly behind the UK average increase of 2.6%. Over the next 12 months, companies expect to significantly ease capital expenditure growth to 1.2%, compared to 1.8% projected for the UK.
In contrast, businesses in Wales recorded one of the strongest increases in R&D budgets of any UK region in the year to Q1 2025. The reported growth of 2.7% was only lower than the increase recorded in the North West (2.9%). However, Welsh companies do not expect this pace of expansion to continue, and companies plan to decrease budgets in the coming year by 0.2%. Wales is the only part of the UK where businesses are planning to cut R&D budgets.