Chancellor Philip Hammond has told the BBC’s Andrew Marr Show that businesses are holding off from investing in the UK because of uncertainty about Brexit.
“It is absolutely clear businesses where they have discretion over investment, where they can hold off, are doing so – you can understand why.
“They are waiting for more clarity about what the future relationship with Europe will look like,” he said.
The second round of Brexit negotiations take place in Brussels on Monday.
Mr Hammond’s comments came as a Confederation of British Industry (CBI) survey suggested that 42% of UK firms believe Brexit has hurt their investment plans.
The CBI called on the government to quickly secure a future EU trade deal.
Mr Hammond said that government ministers were becoming increasingly convinced of the need for transitional arrangements to reduce disruption as the UK leaves the EU.
“Five weeks ago the idea of a transition period was quite a new concept, I think now you would find that pretty much everybody around the cabinet table accepts that there will be some kind of transition,” he said.
“We’re into a real process now with the start of negotiations and I think you’ll find the cabinet rallying around a position that maximises our negotiating leverage and gets the best possible deal for Britain.”
He said a transitional arrangement was “right and sensible both for the UK and EU” and could potentially take a “couple of years”.
Analysis: Joe Lynam, BBC business correspondent
When companies make a big investment, they tend to make a big splash about it. Press releases issued, stock exchanges advised and ministerial blessings acquired.
But when businesses decide NOT to invest in new staff, a new production line or even a new product, we rarely get to hear about it. Companies pausing or cancelling investment – for whatever reason – is counter factual.
So surveys and anonymous polling are the next best way to gauge the corporate mood.
Although some brexiteers regard the CBI as pro EU vassal, its survey showing two-fifths of companies pausing their investment plans because of Brexit, is not an outlier. It chimes with similar reports from the British Chambers of Commerce, Deloitte and the Institute of Directors.
And who would blame firms for holding off? If their biggest market could soon be in or out of the Single Market, in or out of the Customs Union, and beholden or not to the ECJ, does matter for their future investment plans.
Brexit minister David Davis is due in Brussels on Monday for the next round of talks with EU officials.
Rain Newton-Smith, chief economist at the CBI business lobby group, said: “To help British business remain optimistic and keep uncertainty at bay, the government must work quickly to agree the terms of the [Brexit] transition and future trading arrangements.
“That’s why the CBI has suggested staying in the single market and a customs union until a final deal comes into force.
“This is the simplest way of ensuring companies don’t face a damaging cliff-edge and that trade flows can continue without disruption.”