BRITAIN’S economy could shrink by more than a third with another two million people added to the ranks of the unemployed if the coronavirus lockdown lasts for three months, the UK Government’s independent forecaster has suggested.

"That would be the largest single-year deficit since the Second World War,” said the Office for Budget Responsibility

But it also pointed out that after taking a possible 35 per cent hit in the second quarter of the year from April to June, the economy could bounce back quickly if there was a three-month gradual lifting of the imposed restrictions.

It suggested GDP would jump by 25 per cent in the third quarter and a further 20 per cent in the final three months of 2020.

Rishi Sunak, the Chancellor, insisted there was “hardship ahead” but added that things would have been much worse if the UK Government had not acted with unprecedented measures.

On unemployment, the OBR estimated that the rate could hit 3.4 million, around one in 10 of the working population without a job; it is currently 1.3m or 3.9 per cent.

"As with GDP, the rise in unemployment is likely to be very fast as the sharp rise in new claims for Universal Credit already attests. Indeed, we might expect almost all the rise to happen within the first month," explained the forecaster.

It noted that the unemployment numbers could shift again due to uncertainty over whether Government interventions to cover salaries will be extended.

Public sector net borrowing is also expected to increase by £218 billion this year, compared with March forecasts, hitting £273bn, or 14 per cent of GDP.

The OBR said: "The sharp rise in borrowing this year largely reflects the impact of economic disruption on receipts [with smaller effects from policy measures like the business rates holidays] and policy measures that add to public spending [with smaller effects from higher unemployment.]"

Under the scenario the forecaster has examined, public sector net debt would also rise sharply, surpassing 100 per cent of GDP during the year but ends it at 95 per cent compared with previous estimates of 77 per cent.

Forecasters at the OBR were keen to stress this was a single scenario where "for now, we have not assumed the shock has lasting economic consequences" and should not be taken as a sign of what Government policy was likely to be.

Businesses are desperate for access to cash to stay afloat with only a small fraction of the money promised making it into the bank accounts of struggling companies.

The OBR added: "The net effect of the coronavirus impact and the policy response is likely to be a sharp [but largely temporary] increase in Government borrowing that will leave public sector net debt permanently higher as a share of GDP.

"However, the longer the period of economic disruption lasts, the more likely it is that the economy's future potential output will be 'scarred' [thanks to business failures, cancelled investments and the unemployed becoming disconnected from the labour market].

"If that happens, the budget deficit would reverse less of its temporary rise as economic activity recovers, leaving the Government to confront a larger structural deficit and not just higher debt."

Mr Sunak, who is due to lead the daily Downing St briefing later this afternoon, commented on the OBR forecast, saying: “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,” declared Mr Sunak, emphasising how the Government would not be able to protect every job or business.

“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," he added.

Labour’s Anneliese Dodds, said: “Behind these very concerning figures lie many businesses which have gone bust and many people who have lost their jobs.

“Labour has been working constructively with Government on its economic support package. It is clear that additional action needs to be taken to increase the take-up of the different measures. We have called for urgent action in relation to the loans scheme in particular, as take-up is worryingly low.”

The Shadow Chancellor added: “It is absolutely critical that Government now does all it can to minimise the depth and length of the economic impact from necessary anti-Coronavirus measures.” 

Ian Blackford for the SNP said the analysis demonstrated the huge damage coronavirus was doing to the economy and the urgent need for the UK Government to fix the serious gaps in financial support for the millions of people who had lost their jobs or seen their incomes reduced.

"The Chancellor must ensure that businesses have access to cash to stay afloat and that all households get the support they need. This must include a guaranteed minimum income for everyone and strengthened welfare protections, so no one is left behind.

"Too many people have been left out of the current schemes and millions are struggling to pay their bills and support their families when their incomes have been slashed.”

The party leader at Westminster said ensuring the right support was crucial but also warned the UK Government against any rash decision to lift the lockdown too early.

“Protecting lives must be the priority,” declared Mr Blackford. “The lockdown must be in place for as long as is necessary to ensure people do not lose their lives needlessly.”

He added: “These figures also show the need for the UK Government to take bold action to ensure a strong recovery and build a fairer society. This crisis has exposed the deep flaws in UK Government policy and the deep-rooted inequality in society. Fundamental changes will be needed to ensure we learn the lessons and create a more equitable society.

"The SNP will continue to work constructively across parties and press for the support that people, public services and businesses need to get through this crisis."