The UK economy is "headed for the worst of all worlds" as businesses expect activity to fall at the start of next year, according to the Confederation of British Industry (CBI).

The industry group's growth indicator survey found that private sector firms expect to cut down on hiring, reduce output and for prices to rise in the first three months of 2025.

One of the main reasons given by businesses for the poor outlook was Chancellor Rachel Reeves' decision to raise employers' national insurance contributions (NIC) - which is expected to raise around £25bn a year.

While the chancellor accepted the budget decision will not be "easy" for businesses, she said earlier this month the government "made a commitment during the general election... that we wouldn't increase taxes on working people".

Alpesh Paleja, the CBI's interim deputy chief economist, said: "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 budget - particularly the rise in employer NICs - exacerbating an already tepid demand environment."

He added that firms are looking for Labour "to boost confidence and to give them a reason to invest" in 2025, "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".

The CBI's poll, based on responses of 899 companies between 25 November and 12 December, also found expectations for economic growth were at their weakest since November 2022, in the aftermath of Liz Truss's resignation as prime minister.

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Minister defends budget

It comes after the economy shrank by 0.1% in October, according to Office for National Statistics (ONS) figures, for the second month in a row.

Lucy Powell, leader of the House of Commons, told Sky News' Sunday Morning with Trevor Phillips the ONS figures were "disappointing" and said that "of course we want to see these things (economic growth) happening faster".

The Labour MP for Manchester Central said, however: "This is a bit like turning round some huge oil tanker...

"We take a fundamental view here about fixing the foundations, which is about trying to bring some economic stability, which means making sure that the budget adds up, which is something that we didn't inherit.

"We inherited this big black hole in the public finances which we had to put right."

Ms Powell then defended raising employers' NICs, acknowledging while "it was a difficult decision," it was made "to get money into the front line" of the NHS and other services.

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Responding to the CBI's survey, shadow business secretary Andrew Griffith said: "Since taking office, the chancellor has made this country a hostile climate for aspiration, for investment and for growth."

The Conservative MP added: "Rachel Reeves's tax-raising spree and trash-talking her economic inheritance are literally killing businesses and jobs.

"If there is a recession - 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."

(c) Sky News 2024: UK economy heading for 'worst of all worlds', CBI warns - as businesses expect fall in activity