The UK economy is set to witness shallower growth than previously expected as business investment is constrained by Budget cost pressures, according to new research.

The CBI (Confederation of British Industry) has downgraded its growth projection for 2024 and 2025 and predicted an uptick in inflation in its latest economic forecast.

Forecasts from the influential lobby group have predicted that UK GDP (gross domestic product) will increase by 0.9% this year – down from 1% in its June predictions.

It is now also expecting 1.6% growth in 2025, downgraded from an estimate of 1.9% from June.

GDP growth is expected to slow to 1.5% in 2026.

Economists at the CBI said tax and cost increases – such as the rise in national insurance contributions and the increase in the national living wage – have significantly contributed to the downgrade.

The growth in the economy will be largely driven by household spending, with higher-than-inflation wage growth expected to help consumer spending pick up further next year, it said.

However, the CBI said consumption is expected to be lower in 2025 than its previous forecasts as inflation takes longer to come back to the 2% target rate, putting pressure on household budgets.

Inflation is due to pick up further over the rest of the current quarter, having risen to 2.3% in October, it added.

The CBI said it expects this to average 2.6% for 2025 and 2.5% for 2026, with Budget pressures expected to particularly contribute to higher retail and hospitality pricing.

As a result, it has forecast that interest rates – which currently sit at 4.75% – are set to be higher for longer than previously predicted.

Nevertheless, it still expects roughly one 0.25 percentage point reduction a quarter to bring the Bank rate down to 3.5% in the first quarter of 2026.

Louise Hellem, CBI chief economist, said: “Measures in the autumn Budget will increase firms’ costs at a time when their profit margins have already been under pressure.

“Many businesses have told us that these measures will likely push up prices and weigh on their hiring and investment plans going forward.

“Government can support business confidence by taking catalytic actions to increase business headroom for investment.

“Implementing a faster, more transformative timetable for business rates reform, immediate flexibility on the apprenticeship levy, measures to boost tech adoption, and delivering occupational health incentives for the workforce can help address the many challenges firms are facing.”