Coronavirus could leave 2million more people unemployed as UK GDP falls by 35%, according to the Office for Budget Responsbility.
The dramatic drop would happen in the second quarter of 2020 before bouncing back quickly, if a lockdown remains in place for three months, with a three month period of a partial lifting, according to the OBR.
In the scenario, experts at the independent group told the Government that unemployment would rise to 10% of the working population.
It would then ease off later in the year.
Government sources stressed that a decision had not yet been taken on when to ease up on the lockdown and how exactly that could work.
Public sector net borrowing is forecast to reach 15% of GDP – making it the largest single-year deficit since the Second World War.
The OBR said in a projection that Britain’s budget deficit could hit £273 billion in the 2020/21 financial year, five times the OBR’s previous estimate and equivalent to 14% of gross domestic product.
The projection was based on the assumption that the shutdown lasts for three months followed by another three-month period during which restrictions are gradually lifted, the OBR said.
In the scenario, experts at the independent group told the Government that unemployment would rise to 10% of the working population, but will ease off later in the year, and public sector net borrowing is forecast to reach 15% of GDP making it the largest single-year deficit since the Second World War.
Responding to the OBR figures, Chancellor Rishi Sunak told BBC News: “Well the OBR’s independent of Government and as they’ve said this is just one potential scenario, but I think three points.
“I think firstly, look, it’s clear this will have a very significant impact on our economy and (like) common with economies around the world and it’s important that we’re honest about that.
“People should know that there’s hardship ahead. We won’t be able to protect every job or every business as I’ve said. The second point, it’s clear that the report makes clear that the actions we’ve taken, unprecedented actions will help to mitigate the impact of the virus on our economy and if we hadn’t done these things, it would mean that things were a lot worse, for example the impact on unemployment.
“And the last point to make, is it’s clear we must defeat this virus as quickly as possible. That’s not a choice between health and economics, that defies common sense. What we need is just to follow the rules and I’m grateful to everyone for doing that over the Easter weekend.”
Unemployment in the UK has hovered around a record low and stood at 1.34million (3.9%) in the most recent figures – 515,000 fewer than five years earlier.
The Treasury admitted coronavirus would have a “very significant hit” on the economy.
A Treasury spokesman said: “We’ve already said coronavirus was going to have a significant impact and in spite of our unprecedented measures there will be hardship for people and businesses. This report confirms that.”
But the spokesman insisted the report also says the impact would have been “much worse” without the Treasury’s schemes. And “while the impact will be significant it will also be contained in time and there will be a rapid bounce back.”
The Treasury spokesman stressed the OBR, which is an independent body, had chosen “one scenario” for “illustrative purposes” so “we aren’t going to be exactly using those figures” in government predictions.
Asked if a recession “is now inevitable”, the spokesman did not confirm or deny it but said it was “clear” there will be a significant hit to the economy.
A recession is defined as two consecutive quarters of negative GDP growth.
It comes as the government is slammed over hold-ups in its £5m “interruption loans” to firms.
Only 4,200 had been approved as of Sunday, despite 300,000 inquiries.
Labour peer and former chancellor Alistair Darling warned the Government had “no alternative but to see this out” in economic and health terms over coronavirus “because the cost of not doing so would be absolutely horrific”.
Asked how long the economy could survive the lockdown, he told BBC Radio 5 Live’s The Emma Barnett Show: “Well there’s a limit, but actually nobody knows what it is because we’ve not been here before…
“The problem we’ve got today is that we’re not yet on top of this epidemic, we don’t know how long it is going to last and the very fact that we don’t know whether we’re going to have a lockdown continuing for three weeks or maybe beyond that, at least to some extent demonstrates the scale of the problem that we’ve got.
“What I would say to you though is, the Government has no alternative but to see this out, both in financial terms, economic terms as well as in health terms, because the cost of not doing so would be absolutely horrific.”
Dr. Kerstin Braun, President of Stenn Group, an international provider of trade finance, commented: “The OBR’s estimate of a 35% reduction in GDP from April to June is certainly likely, and demonstrates the level of economic damage at stake, but by the end of the year the gap will close to single-digits.
“The longer the shutdown, the deeper the economic damage. Household consumption is limited to essential goods, which are only about 10% of the economy. The remaining 90% is either closed or disrupted. The economy will not be able to start back up all at once – it’s not like flipping a switch.
“The recovery will be uneven. We can expect that consumer spending will be muted for some time and will only come back as jobs return and uncertainty fades.
“For businesses, we have to anticipate that some companies will not survive, even trusted household names. In an era of cheap money prior to the pandemic, firms increased their debt levels, often not to invest in themselves but to shore up struggling operations. Even if they make it through government loans and assistance, companies are facing debt burdens that will strain them for years to come.
“Companies engaged in global trade of both goods and services should expect strong competition and even protectionist measures as governments do whatever they can to shore up domestic economies.”
