Growth expectations among UK companies have taken “a decisive turn for the worse”, in a fresh blow to Rachel Reeves amid warnings that business confidence has plummeted since the budget.
For the first time this year, expectations for growth have turned negative, according to the Confederation of British Industry’s latest growth indicator, which shows that a majority of companies expect activity to decline in the three months to February.
Business volumes in the services sector are anticipated to decline, including in consumer services, with more firms in the business and professional services sectors expecting a drop in activity than a rise in the next three months.
The gloomier outlook comes as private sector activity declined again in the three months to November, according to the CBI, with all three major sectors – services, manufacturing, and wholesale and retail – reporting falling business volumes, sales or output.
Reeves’s budget, at the end of October, contained £40bn of tax rises including £25bn from increasing the national insurance contributions (NICs) paid by companies. The chancellor has said the decisions were necessary to stabilise the public finances, and fund better public services.
Alpesh Paleja, the CBI’s interim deputy chief economist, said: “As we head into 2025, expectations for growth have taken a decisive turn for the worse. Our surveys suggest that anticipated activity was already weakening heading into the October budget, and the chancellor’s announcements have left businesses with even more tough choices to make.
“News that firms are planning to reduce headcount is a concern, with hiring intentions at their weakest since the tail end of the Covid-19 pandemic. This could be an early sign of the impact of higher labour costs from the upcoming rise in employer NICs, and the uprating in the national living wage.”
The CBI is calling on the government to move “quickly and decisively to reform business rates, deliver apprenticeship levy flexibility, and boost occupational health incentives to support the health of the workforce”.
Business leaders are worried about the UK government’s ability to achieve growth over the next five years. The London Chamber of Commerce and Industry (LCCI) said it acknowledged the government’s need to take tough decisions to help repair public finances but believes the policies announced in the budget and employment rights bill created a “perfect storm” for businesses in the capital. It said the government would be unable to achieve the long-term growth it has made a cornerstone of its strategy.
About 81% of business leaders who are members of the chamber said they were not confident that the government would listen to and address concerns from the business community, and 77% were not confident that the government would succeed in its commitment to economic growth.
Business confidence has plunged to its lowest level since the early months of the Covid-19 pandemic, according to a separate report from the Institute of Directors at the weekend. Its economic confidence index, which measures business leader optimism in prospects for the UK economy, fell to -65 in November from -52 in October, the fourth monthly fall in a row. That is the lowest reading since the record low of -69 in April 2020.
The LCCI’s snap survey of more than 200 business leaders showed almost four-fifths of businesses of all sizes said that increased employer national insurance would negatively or very negatively affect their business, leading to almost half predicting a hiring freeze and lower pay for staff in the coming years.
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Firms are also concerned about the employment rights bill, with 38% predicting the changes will mean a hiring freeze, while 16% warn it will lead to job losses.
Just over three-quarters feel that the government has not meaningfully engaged with businesses on the measures, which include protection against unfair dismissal for employees from day one; a universal entitlement to sick pay from the first day of illness; changes to the minimum wage and giving more than 1 million people on zero-hours contracts the right to gain guaranteed working hours if they want them.
Karim Fatehi, the chief executive of the London chamber, said: “This snap survey has confirmed our worst fears; the business community views the combined package of increased employer national insurance contributions, cuts to business rates relief and the employment rights bill as a serious threat to their operations over the coming years.
“It also shows that London businesses are fast losing faith in the government’s economic growth strategy. Having weathered a cost of living crisis, soaring inflation, higher borrowing costs, and trade tensions, businesses need the operating conditions conducive to economic growth rather than measures that curtail their ability to invest in their business, hire new people and train their staff.”
Family businesses are worried about changes to inheritance tax (IHT), with just over a fifth saying they were likely to wind up their family businesses instead of passing them on, according to the LCCI survey.
Weighing in on the IHT debate, research by the CBI’s economic consultancy found that the decision to cap business property relief at £1m could lead to more than 125,000 job losses in the coming years and lead to a significant reduction in economic activity and lower tax revenues. The study, on behalf of the group Family Business UK, calculated that the measure would also reduce the value of goods and services produced across the economy by £9.4bn.