Rachel Reeves has been accused of leaving the British economy ‘on its knees’ as businesses crumble under rising costs and taxes.

In a devastating double-whammy ahead of the Chancellor's likely sacking, reports showed manufacturers and the once-mighty services sector floundering as confidence evaporates.

The CBI said Britain’s factories have suffered the biggest fall in output over the past three months since the depths of the Covid-19 pandemic six years ago when the economy was in lockdown.

At the same time, S&P Global reported the sharpest fall in service sector activity for nearly three-and-a-half years this month.

Chris Williamson, chief business economist at S&P Global, said it suggested the economy is on course to contract for a second month in a row in June – fuelling fears of recession.

The grim figures make a mockery of Keir Starmer’s claim during his resignation speech on Monday to have - alongside Reeves - built a ‘stronger’ economy.

And analysts warned political uncertainty is now hitting confidence and investment at a time when business is struggling in the face of Labour’s tax hikes and an inflation shock due to the Iran war.

Cameron Martin, senior economist at the CBI, said: ‘Political uncertainty risks holding back investment at a time when manufacturers are already grappling with high costs and weak demand.

‘The Prime Minister’s resignation should not distract from the urgent need to go further in reducing industrial energy costs.

‘Lowering the cost of doing business must remain central to the government’s ambitions, helping manufacturers to invest and grow.’

Williamson said: ‘For the growth and inflation outlooks, much depends on progress towards an end to the conflict in the Middle East, but closer to home we are seeing signs of the unstable political environment unsettling business confidence and delaying spending, which will also need to calm in order to lay better foundations for economic growth to revive.’

Shadow business secretary Andrew Griffith said: ‘Crashing confidence is no surprise. Keir Starmer and Rachel Reeves have left the economy on its knees.

‘Piling on taxes and costs, making it harder to hire, and high energy costs were always going to damage confidence and economic growth.

‘The damning fact is that this government has never understood business. The kindest thing that can be said is that the bar has been set low for the next Prime Minister and Chancellor.’