London, UK – Business confidence in the United Kingdom has plunged to its lowest level on record in September, driven by mounting concerns over escalating costs, particularly labour expenses and energy prices, according to the latest survey from the Institute of Directors (IoD).
Confidence Hits New Depths
The IoD’s Directors’ Economic Confidence Index recorded a stark -74 reading for September 2025, surpassing the previous record low and marking the most significant downturn since the index’s inception in July 2016. This represents a sharp decline from -61 in August and follows a brief, fleeting improvement at the end of the summer. Confidence in the prospects for individual businesses also deteriorated, falling to -7 in September, a match for the low recorded in November 2024. More than a third of surveyed business leaders (37.4%) expressed extreme pessimism regarding the broader UK economic outlook for the next 12 months, with only a small fraction (6%) feeling optimistic.
The Driver: Escalating Costs
Underlying the collapse in confidence are record-high cost expectations, which rose to +89 in September, the highest reading since November 2017. Labour costs have emerged as the most significant factor, cited by 83% of respondents as a primary driver of their cost outlook, a substantial increase from 77% in March. This surge in employment costs is largely attributed to the increases in employer National Insurance Contributions (NICs) and the National Living Wage that took effect in April 2025, alongside ongoing concerns about future employment regulations. Supply chain inflation (34.4%) and energy costs (32.1%) also remain significant pressures.
Broader Economic Landscape
The downturn in business sentiment occurs against a backdrop of slowing economic growth. The United Kingdom economy grew by a modest 0.3% in the second quarter of 2025, a slowdown from the 0.7% expansion seen in the first quarter. This growth was primarily supported by the services and construction sectors, but the production sector experienced a concerning decline of 0.3%. Business investment also contracted by 1.1% in the second quarter, and investment intentions have now fallen to -20 according to the IoD survey.
Inflationary Headwinds and Policy Concerns
Adding to the economic unease, policymakers at the Bank of England have indicated that inflation may prove more persistent than initially anticipated. Concerns are rising that price pressures, particularly from food prices, could linger into 2026. The latest projections suggest inflation could rise to around 4% in the coming months before a gradual descent towards the 2% target by mid-2027. Business leaders are also increasingly vocal about the impact of government-generated costs. Persistent fears that taxes on businesses and assets may increase are cited as stifling confidence and holding back investment.
Political Reactions and Future Outlook
Shadow Chancellor Mel Stride attributed the sharp decline in business confidence directly to “deliberate choices made by the Labour government,” arguing that economic instability is not due to global uncertainty but domestic policy decisions. Business leaders are calling for a clear and credible plan for economic growth, coupled with a reduction in regulatory and tax burdens. The current sentiment suggests a subdued outlook for the UK economy as the year progresses, with falling investment intentions and a dip in headcount expectations indicating potential challenges for job creation and expansion. The trend in business news highlights a critical juncture for the United Kingdom’s economic recovery.
