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.

Kim Johnston, ICAEW director, Scotland, said: “There has been a sharp drop in business confidence in Scotland, mirroring the results we’ve seen across most of the UK. This comes amid a context of concern from companies around geopolitical risks, cost pressures and subdued sales.

“With widespread economic disruption caused by conflict in the Middle East, it’s unsurprising that energy costs were the biggest challenge reported by Scottish businesses, the most acute in any UK region we surveyed. Scottish businesses also reported concerns about exports growth which likely follows slowing US demand for Scottish whisky and salmon as a result of tariffs.

“The findings suggest that ongoing uncertainty and cost pressures are increasingly influencing business decision-making, with many firms adopting a more cautious outlook for the coming year.”