British firms are predicting a sharp fall in business activity in the new year, in the latest economic snapshot to warn of an increasingly gloomy outlook for the UK in 2025.

The growth indicator survey from the Confederation of British Industry (CBI) indicates firms are preparing to cut down on hiring and reduce output over the next three months.

Businesses are trying to cushion the blow from Rachel Reeves’ decision in her October budget to raise £25bn by raising employers’ national insurance contributions (NICs).

While the chancellor has said the money is necessary to plug a “black hole” in the public finances left by her predecessors, she has conceded it may mean lower wage increases, while others have argued it will cost jobs. The CBI said the NICs increase had exacerbated “an already tepid demand environment”.

The poll of 899 companies between 25 November and 12 December found expectations for growth were at their weakest since November 2022, in the chaotic aftermath of Liz Truss’s short term as prime minister.

The pessimism was wide-ranging, with the service sector expecting a decline in activity and manufacturers expecting output to fall sharply in the three months to March 2025.

Separate data published on Monday suggests retailers face a further blow in the new year. Consumer spending forecasts have fallen by six points, according to the British Retail Consortium, hitting nearly every retail category. “If these expectations are realised, retailers could find themselves facing a new year spending squeeze just as they unveil their January sales,” said the BRC chief executive, Helen Dickinson.

The releases cap seven days of tricky economic data for the government as it attempts to kickstart growth. The CBI’s separate industrial trends survey published last Wednesday found total orders at UK factories had collapsed in December to the lowest level since the peak of the Covid pandemic in 2020.

Meanwhile, the Bank of England said as it held rates at 4.75% last Thursday that it expected UK growth to flatline in the final three months of the year, after inflation rose on Wednesday to an eight-month high of 2.6%.

Analysts warned on Friday that a dramatic economic slowdown paired with rising borrowing costs since the budget could end up undermining government finances and ultimately force Reeves to further increase taxes.

City economists have said rising inflation over the past three months would force the Bank to keep interest rates high, which in turn could weigh on household spending and dent Reeves’s plans to grow the economy.

Meanwhile, the prospect of a trade war with the US after Donald Trump is inaugurated in January could also harm the government’s growth plans. In statements on social media on Friday, the president-elect threatened the EU with tariffs on exports to the US, which could be extended to include the UK.

The CBI said: “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.”

The Commons leader, Lucy Powell, defended the government’s track record on Sunday, saying that while she shared the public’s disappointment over the state of the economy, Labour’s inheritance meant it was going to take time to make substantial changes.

A Treasury spokesperson said: “We had to make difficult decisions at the budget to fix the economy and the £22bn black hole this government inherited. We have wiped the slate clean and delivered the stability businesses so desperately need.

“More than half of employers will either see a cut or no change in their National Insurance bills.

“We have capped corporation tax at the lowest rate in the G7, provided 40% business rates relief next year for 250,000 properties where there were no plans to do so, launched a 10-year infrastructure strategy and are creating pension mega funds to boost investment in British businesses, infrastructure and clean energy. This is alongside establishing a National Wealth Fund to catalyse over £70bn in investment to drive growth in our to boost investment in British businesses.”