Business activity in the UK is on course to shrink for the first time in more than two years as companies cut jobs and rein in investment following the budget, according to the Confederation of British Industry’s monthly growth indicator.

The employer group’s survey of member firms found that the budget measures announced in October, including a £26 billion ($33 billion) increase to payroll tax, “has hit sentiment across the private sector,” compounding the uncertainty caused by the three-month wait for the budget following Labour’s landslide victory in the July 4 election.

Companies, who gave their expectations for the outlook over the next three months, plan to let staff go as hiring intentions fell their weakest since the tail-end of the COVID-19 pandemic.

UK Employers Warn Tax Rise Will Hit Investment and Pay

The dismal outlook comes in the wake of similar findings by the Institute of Directors. The IoD’s optimism tracker for November, published on Sunday, found businesses were the most pessimistic since April 2020, at the start of the pandemic.

The collapse in sentiment follows Chancellor Rachel Reeves’ tax raid on private industry as she looks to repair Britain’s ailing public services. Alongside the increase to employers’ National Insurance Contributions, she extended inheritance tax to farms and increased the minimum wage by 6.7%.

Reeves has pledged to speed up UK economic growth and increase employment but bosses warn that her budget will undermine both priorities. The economy unexpectedly slowed almost to a halt in the three months to September, growing just 0.1%, and contracted 0.1% for the month of September alone.

“As we head into 2025 expectations for growth have taken a decisive turn for the worse,” said CBI interim deputy chief economist Alpesh Paleja. “News that firms are planning to reduce headcount is a concern. This could be an early sign of the impact of higher labor costs from the upcoming rise in employer NICs, and the uprating in the National Living Wage.”

The CBI growth indicator for the three months to February found that activity will fall, with a weighted balance 10% of firms anticipating a contraction for the first time this year. It was the weakest reading since the three months to December 2022 “as members reported a mostly negative reaction to the chancellor’s announcements.”

The survey found that the powerhouse services sector is on track to shrink while manufacturers anticipate a little growth. The CBI’s backward looking indicator — for the three months to November — found that activity has already reversed and the pace of decline increased sharply following the October budget.

Photograph: Shoppers cross Oxford Circus in London. Photo credit: Chris Ratcliffe/Bloomberg

Copyright 2024 Bloomberg.