UK firms are expecting to reduce both output and hiring this quarter, according to a survey conducted by the Confederation of British Industry (CBI).
Activity has been flat or falling since the middle of 2022, reflecting a prolonged period of stagnation.
The survey suggested that sentiment among businesses dipped in the aftermath of the Government's Autumn Budget.
Some businesses said that the tax rises had resulted in them reviewing their budgets at short notice and taking steps to mitigate higher costs.
Plans include raising prices to pass on additional costs to clients, trimming investment plans and cutting staff to reduce business expenses.
Alpesh Paleja, Interim Deputy Chief Economist at the CBI, said:
'After a grim lead-up to Christmas, the New Year hasn't brought any sense of renewal, with businesses still expecting a significant fall in activity. Alongside plans to cut staff and raise prices further, this risks an increasingly awkward trade-off for policymakers.
'Anecdotes suggest that companies are being hit by lacklustre demand and caution among consumers, while also continuing to adjust to measures announced in the Budget.
'There is an urgent need to get momentum back into the economy. The government can help shift the UK's economic narrative with more determined focus on measures that could drive growth.'
Internet link: CBI