Businesses have issued a warning to Rachel Reeves that the economy is "headed for the worst of all worlds" with activity expected to fall sharply in the first three months of 2025.

A major survey by the Confederation of British Industry (CBI) found firms expected to reduce both output and hiring. The Chancellor’s hike to employers’ national insurance, expected to net about £25bn a year, was highlighted as one contributing factor to the bleak outlook.

Alpesh Paleja, CBI’s interim deputy chief economist, lamented: "There is little festive cheer in our latest surveys, which suggest that the economy is headed for the worst of all worlds – firms expect to reduce both output and hiring, and price growth expectations are getting firmer.

"Businesses continue to cite the impact of measures announced in the – particularly the rise in employer NICs – exacerbating an already tepid demand environment.

"As we head into 2025, firms are looking to the Government to boost confidence and to give them a reason to invest, whether that’s long overdue moves to reform the apprenticeship levy, supporting the health of the workforce through increased occupational health incentives or a reform of business rates.

"In the longer term, businesses will be looking to the industrial strategy to provide the stability and certainty which can unlock innovation and investment – and provide that much-needed growth for the economy which can deliver prosperity for firms and households alike."

The CBI's latest growth indicator survey, which gathered insights from 899 companies between November 25 and December 12, has revealed that growth expectations are now at their most pessimistic since the aftermath of Liz Truss's turbulent stint as Prime Minister.

The anticipated downturn is widespread, with service sector business volumes expected to drop, alongside sharp declines in distribution sales and manufacturing output over the next three months.

The survey highlighted a significant 24 percentage point disparity between negative and positive responses regarding future output, deteriorating from a 10-point gap in November. This marks the gloomiest outlook since the -27 gap recorded in November 2022, adding to the economic woes faced by Ms Reeves following a string of disheartening economic data.

FIgures have shown that the UK economy shrank in October, marking the second consecutive month of contraction since the pandemic. The ONS reported a 0.1% GDP decrease for October.

Additionally, CPI inflation climbed to 2.6% in November, reaching its highest rate since March and marking the second successive monthly rise. Meanwhile, the Bank of England has maintained interest rates at 4.75%, amidst warnings of "heightened uncertainty in the economy".

Shadow business secretary Andrew Griffith slammed the Chancellor's approach, saying: "Since taking office, the Chancellor has made this country a hostile climate for aspiration, for investment and for growth. ’s tax-raising spree and trash-talking her economic inheritance are literally killing businesses and jobs.

"If there is a – and based on these CBI expectations that seems increasingly likely – it will be one made in Downing Street.Labour needs to urgently change course before the damage they are doing becomes even greater."