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Reeves Faces New Year Hit With UK Business Activity Set to Fall

Glass bottles on the production line at the Encirc Glass factory in Chester, UK, on Friday, Oct. 4, 2024. Chancellor of the Exchequer Rachel Reeves hinted at plans that could unlock billions of pounds of investment in the climate transition and other government priorities as she promised to deliver a UK budget showing “real ambition.” Photographer: Anthony Devlin/Bloomberg (Anthony Devlin/Bloomberg)

(Bloomberg) -- UK private sector activity is set for a “steep” decline in the next three months, the Confederation of British Industry said, putting immediate pressure on Chancellor of the Exchequer Rachel Reeves to show she can deliver economic growth in the new year.

All three major sectors are expecting volumes to fall in the first quarter, with manufacturers’ expectations at their weakest since May 2020, according to the CBI’s monthly growth indicator survey. 

Headcount is due to be cut “sharply” in the three months to March, the survey of businesses suggested, with hiring intentions at their weakest since October 2020. The drop in business activity would be the steepest in almost four years if it materializes.

The bleak outlook from the UK employers’ group shows the scale of Reeves’ challenge to turn around economic sentiment, after her tax-raising budget in October was widely criticized by businesses for going against the new Labour government’s claim to be prioritizing growth.

Gross domestic product fell for the second consecutive month in October as consumers braced for the budget at the end of that month, in which Reeves said she had to raise taxes because of the fiscal inheritance left to her by the previous Conservative government.

The chancellor’s decision to focus her revenue raising on a £26 billion ($32.7 billion) hike to a key business payroll levy appeared to be putting the brakes on economic activity and impacting hiring intentions, the CBI said.

“The economy is headed for the worst of all worlds,” said Alpesh Paleja, the CBI’s interim deputy chief economist. “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 National Insurance contributions — exacerbating an already tepid demand environment.”

“We had to make difficult decisions at the budget to fix the economy and the £22 billion black hole this government inherited,” a Treasury spokesperson said in an emailed statement responding to the survey. “We have wiped the slate clean and delivered the stability businesses so desperately need.”

Conservative shadow business secretary Andrew Griffith said the survey raised the prospect of a recession in Britain. 

“If there is a recession — and based on these CBI expectations that seems increasingly likely — it will be one made in Downing Street,” he said.

©2024 Bloomberg L.P.