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The CBI, which represents 190,000 UK businesses, said Prime Minister Rishi Sunak and Chancellor Jeremy Hunt had succeeded in stabilising the markets following Liz Truss's mini-budget.
But it said that the UK is in recession and that action is needed to boost productivity and economic growth in the long-term.
Business investment is set to be 9% below pre-pandemic levels by the end of 2024, according to its forecast.
The CBI urged the government to address worker shortages and find ways to unlock business investment through capital allowances and regulatory changes, such as "removing the de facto ban on onshore wind, improving mobility to facilitate trade in services and updating the national planning policy framework."
Tony Danker, CBI director-general, said: "Britain is in stagflation – with rocketing inflation, negative growth, falling productivity and business investment. Firms see potential growth opportunities but a lack of “reasons to believe” in the face of headwinds are causing them to pause investing in 2023. Government can change this. Their action or inaction to support growth and investment will be a key determinant of whether recession is shallow or deep.
"We will see a lost decade of growth if action isn’t taken. GDP is a simple multiplier of two factors: people and their productivity. But we don’t have people we need, nor the productivity.
"There is no time to waste. The Prime Minister and Chancellor must use levers of growth to ensure this downturn is as short and shallow as possible, but also to address the persistent weakness in investment and productivity. We cannot afford to have another decade where both are stagnant."
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