Quarterly Economic Survey - Q1 2026

Summary

* The report uses data from the Quarterly Economic Survey carried out from 09/02/26 and 09/03/26 in the first quarter (Q1) of 2026.

Wider Economic Context

Results

Commentary

*Commentary generated by Google Gemini AI Agent

Recruitment challenges and mounting price pressure reported by East Midlands firms in latest research

The feedback from local businesses based on current economic conditions impacting the business: Open responses from East Midlands firms give a sense of ongoing fragility, driven by escalating operational costs and new legislation, seen as restrictive. SMEs feel disproportionately impacted by National Insurance hikes, minimum wage increases and regulation in the incoming Employment Rights Act, which are stifling recruitment and eroding margins.

Fiscal pressure, alongside cautious consumer demand and labour market uncertainty has triggered a retreat in investment. While some firms are pivoting towards global markets, many face a fight for survival with confidence undermined by what is perceived as an increasingly hostile environment for entrepreneurship.
Sentiment on the economy shows concerns about inflation, corporate taxation, and business rates remain.

A cautious optimism has emerged among the findings of East Midlands businesses in Q1 2026, although it should be noted that any impact resulting from the Middle East conflict is unlikely to become fully clear until publication of subsequent Quarterly Economic Surveys.

While inflation remained a primary concern in Q1 and recruitment challenges, in terms of finding suitable candidates to fill roles, have increased slightly, indicators like overseas orders and turnover confidence show positive net growth.

Most East Midlands businesses reported operating below their full capacity, yet stability in investment and cash flow reflects underlying resilience. This data-driven outlook could indicate signs that the region is entering a period of stabilisation but with firms navigating significant labour cost pressures and the potential for inflation to be driven up by factors like the Middle East conflict, forthcoming quarters of 2026 may paint a clearer picture.

University of Leicester School of Business Professor of Finance and FinTech Mohamed Shaban said:

The QES indicators for the first quarter of 2026 reflect a mixed picture of resilience and caution among East Midlands businesses, marked by a steep fall in the State of Economy Index. This overall sentiment is shaped by persistent pressures from inflation and corporate taxation – the region’s top business concerns – as well as a complex domestic and international economic environment.

The significant improvement in overseas orders, together with the turnaround in UK sales and a marked easing in cash-flow pressures, suggests that demand is strengthening in international markets while liquidity conditions are becoming less restrictive for many firms. These gains are encouraging, particularly for the 42% of businesses active in export markets and are supported by slightly less negative investment intentions in both machinery and training.

Despite these positive shifts, the labour force indicator has remained negative and recruitment difficulties persist, signalling that businesses continue to adopt a cautious approach to employment expansion amid cost and skills challenges. Future workforce plans, however, show greater optimism for the months ahead.

The positive takeaway from the indicators is the business confidence in continuing to grow in terms of turnover and profitability.

In the next quarter, we expect indicators to show a more consistent direction as the full effects of recent policy measures materialise. Nonetheless, escalating international political tensions in the Middle East, particularly disruptions in critical energy supply routes, are pushing up global oil and gas prices. This is expected to intensify pressures on the cost of living while raising operating costs for businesses, further compounding inflationary challenges and squeezing margins. Greater stability in both the domestic policy framework and the global geopolitical landscape, combined with targeted support for skills development and energy cost mitigation, will be essential if the East Midlands is to capitalise on the emerging international momentum and strengthen overall business performance across the region.