Businesses in the UK are sinking deeper into a quagmire of rising costs, thanks in large part to the fuel crisis, geopolitical challenges and employment legislation. Now, with one of the UK’s leading economic forecast groups warning the country will “flirt with recession” this summer – and nearly 250,000 more people projected to lose their jobs by mid-2027 – the question for small businesses is no longer whether the pressure will ease, but how long they can hold out.
Given the scale of those roadblocks, it’s no wonder UK CFO confidence has dipped to a six-year low. According to Deloitte’s latest CFO Survey, conducted between 16 and 30 March 2026, optimism among UK finance leaders fell to a net -57% – down sharply from -13% in the previous quarter.
The CFOs named geopolitical risk as the greatest external threat to their businesses, with energy prices and inflation rounding out their top three worries, and 61% of CFOs flagging both as major concerns for the next three years.
While Deloitte’s survey covers the UK’s largest businesses, it sheds light on the ripple-effects for small businesses, which not only form the backbone of the UK economy, but also have far less room to absorb the shocks.
The Recession Warning SMEs Can’t Ignore
On Monday, the EY Item Club delivered its starkest outlook yet, claiming the Iran war’s disruption to global energy supply chains will push the UK to flatline in Q2 and Q3 this year, leaving the country at risk of a technical recession. The group predicts that GDP growth is projected to halve from 1.4% in 2025 to just 0.7% in 2026, while unemployment is forecast to climb to 5.8% by mid-2027 – with nearly 250,000 more people out of work.
Matt Swannell, the Item Club’s Chief Economic Adviser, said: “Spiralling energy costs and disruption to supply chains will push the UK to the brink of a technical recession in the middle of this year. Consumers’ spending power will be squeezed, while more expensive financing arrangements and a less certain global economic backdrop will pour cold water on companies’ investment plans.”
Tueday’s ONS April Labour Market report offered a surface-level reprieve – unemployment dipped to 4.9% in the three months to February. But that data predates the Iran war, which began on 28 February. The same ONS release includes more timely PAYE payroll data, and that picture is starker: 11,000 jobs were cut in March alone, twice the 5,000 economists expected, with February revised from a gain of 20,000 to a loss of 6,000. Vacancies are at their lowest in nearly five years. Wage growth fell to 3.6% – the weakest since November 2020.
Stuart Morrison, Research Manager at the British Chambers of Commerce (BCC), has been watching business confidence erode for years.
“We’ve seen almost all indicators either in decline or not seeing any particularly strong growth,” he told Employment Hero.
“When you look back at everything businesses in the UK have been up against – from the pandemic, the recovery, the Ukraine war, multiple budgets, Brexit, and now the war in Iran – it’s been one battle after another. Cost rises are coming from almost every angle at this stage.”
The BCC’s own forecasting has unemployment reaching 5.5% this year – and Morrison was clear that figure was set before the full scale of the Iran conflict was known. “We expect things to get worse over the course of the year,” he said.
The Pump Price Crunch
For sole traders, the biggest fallout from geopolitical instability has come in the form of rising fuel costs.
A recent survey, FairFuelUK’s March poll of 3,678 sole traders (bricklayers, plumbers, electricians and others across the UK), found that 36.4% said current pump prices could drive their businesses to the brink of collapse without intervention from the Government. For these trades, it’s clear that volatile fuel prices aren’t an abstract risk. Without help, they eat into every aspect of the business, from day-to-day operations to hiring.
The Deloitte data puts this in broader context. In the CFO Survey, higher energy prices received a rating of 70 this quarter (100 being the highest), up from 47 just three months ago. When the UK’s biggest companies are rattled by energy costs, the smallest ones are already in crisis.
Morrison has seen businesses getting creative in response: “We’re speaking to firms looking at solar panels, heat pumps, reviewing their office use, car sharing with staff – small measures to keep energy and fuel costs down.”
But he was clear those measures have limits. “So much of the cost of fuel and energy includes taxes and levies that the Government could consider moving into general taxation. We need the Government to help alongside what businesses are doing themselves.”
What Employment Hero’s March Jobs Report Says
While Deloitte’s survey captures sentiment across large businesses, Employment Hero’s March Jobs Report tracks actual hiring activity across the UK’s SME sector – and the picture it paints is more nuanced than a simple slowdown.
The data shows full-time employment across SMEs is up 14.6% year-on-year – a figure that sits nearly three times above the overall employment growth rate of 5.3%. Month-on-month, full-time roles grew 1.1% in March, and over the past three months they’re up 4.2%. On the surface, that looks like resilience.
But part-time and casual work tells the opposite story. It fell -0.5% month-on-month in March and is down -0.4% over the past three months. While the annual picture is modestly positive at 3.3%, the trajectory is clear: SMEs are creating full-time roles at pace, and pulling back from flexible arrangements.
The reasons are no mystery. SMEs have been absorbing wave after wave of cost increases over the past 12 months. Employer National Insurance contributions rose in April 2025, with the Bank of England finding that more than half of UK businesses (53%) expected to reduce headcount in response – a figure that remained above 43% months later.
Additionally, the National Living Wage for workers aged 21 and over rose to £12.71 an hour in April 2026, a 4.1% increase that has placed mounting pressure on sectors reliant on lower-paid, flexible staff. And Employment Rights Act measures – including day-one sick pay, extended paternity leave and greater liability exposure from employment claims – have added yet another layer of cost and obligation.
A Jobs Market Holding its Breath
The KPMG and REC UK Report on Jobs, also published this week, paints a similar picture across the wider economy. Permanent placements fell again in March – with Middle East conflict and rising costs both cited – while candidate availability rose at its fastest pace in 2026 so far, driven by redundancies and job scarcity. Starting salaries, meanwhile, grew at their weakest rate in five months.
Regulation on Top of Everything Else
Beyond energy and payroll, Morrison flagged a theme that comes up constantly when the BCC speaks to smaller firms: the Employment Rights Act.
“There’s real concern about it,” he said. “Some requirements have already come into force, more are coming over the next few years. The smallest businesses don’t have the capacity to keep on top of what has been a moving feast of potential regulations. Clear guidance from government on exactly what’s required of them – depending on their size – would make a huge difference.”
What This Means for SME Employers
What makes this landscape particularly challenging for SME leaders right now is the fact that there are mounting pressures to manage. Not only is global instability pushing up energy prices, domestic policy is raising the cost of every hire too. A cooling labour market on top of this, while creating more candidate choice, won’t help to reduce the compliance burden each new employee brings.
Cost control is now the top priority for 68% of UK CFOs, up from 51% last quarter, according to Deloitte’s CFO Survey. For SMEs without the financial reserves that larger businesses enjoy, that same instinct – cut costs, conserve cash, hold fire on flexible hiring – could be the difference between keeping the lights on and closing the doors for good.
Morrison’s assessment was direct: “British businesses are resilient – they’re coming up with creative solutions. But there’s only so much they can do themselves. They need government to meet them halfway.” With EY now projecting unemployment at 5.8% by mid-2027, and the BCC’s own forecasts pointing in the same direction, that halfway point is running out of road.
