CAPITAL’S BUSINESS ACTIVITY INDEX CLIMBS TO 57.7 IN SHARPEST EXPANSION IN TWO YEARS
Private sector activity in London expanded at its fastest pace in exactly two years in January, signalling renewed momentum in the capital’s economy as client confidence, overseas demand and business investment gathered strength at the start of 2026.
The headline London Business Activity Index, a seasonally adjusted measure tracking month-on-month changes in output across manufacturing and services, rose to 57.7 in January from 54.9 in December. The reading — comfortably above the 50.0 threshold that separates growth from contraction — marks the sharpest expansion since early 2024 and positions London as the UK’s strongest-performing region.
Surveyed firms attributed the upswing to a rebound in client confidence, inflows of new overseas work and increased corporate investment. Expectations for the year ahead also strengthened, with sentiment climbing to a 16-month high as companies expressed optimism about demand, product development and broader economic conditions.
Catherine van Weenen, Territory Head of Commercial Mid Market at NatWest, said: “The economic signals provided by London firms look increasingly positive as we start 2026. January was a bumper month for private sector activity as panellists indicated that the reduction in policy uncertainty had lifted business spending. They also highlighted inflows of new work from overseas amid improving conditions in key markets such as the EU and the US.
“Although cost pressures continued to act as a dampener on hiring, a further increase in outstanding work levels at London firms – the first consecutive rise in over one-and-a-half years – could lead companies to rethink their recruitment pauses.
“Pricing power remains a question mark. Despite input costs rising sharply, London companies recorded the joint-slowest increase in selling charges in the UK, amid heightened levels of client aversion to price rises. That said, strengthening demand levels may provide companies with more wiggle room.”
London outperformed the UK average in January, recording a robust rise in new business inflows that far exceeded the national trend. Respondents linked stronger sales growth to improved confidence following the government Budget, alongside a pick-up in orders from overseas clients.
Out of the 12 monitored UK regions and nations, London ranked first for both sales growth and future expectations. Across the UK as a whole, business confidence also climbed to its highest level since September 2024, underlining a broader improvement in corporate sentiment.
Yet the recovery remains uneven. For the 13th time in the past 14 months, London-based firms reduced headcounts. The pace of job shedding accelerated compared with December and was described as sharp overall, mirroring national patterns. Companies frequently cited cost-saving initiatives, hiring freezes and narrower recruitment strategies as they grappled with elevated operating expenses.
At the same time, capacity pressures intensified. Outstanding business volumes rose for a second consecutive month — the first sustained increase in more than 18 months — as rising new orders expanded pipelines and lengthened completion times. While London recorded a build-up of backlogs, the UK overall saw a slight decline.
Cost inflation remains a central challenge. Although the rate of operating expense growth eased to a three-month low, it remained significantly above the long-run average recorded since 1998. Wage pressures were repeatedly highlighted, with firms pointing to tax policy changes and constraints in skilled labour availability as key drivers.
Higher wage bills fed through to selling prices. London companies reported a solid increase in output charges during January, but the rate of price growth was the second-weakest since April 2021, surpassed only by November 2025. Among the 12 monitored UK regions, London’s increase in selling charges was joint-slowest alongside Scotland, reflecting heightened competition, softer fuel costs and continued resistance among clients to fee rises.
The data present a picture of an economy regaining pace but still contending with structural cost pressures. Stronger overseas demand and revived domestic confidence have propelled London to the forefront of UK regional performance, yet firms remain cautious about pricing power and hiring decisions as 2026 unfolds.
