Modelling by Government advisers has shown that the contract by 35% in the second quarter of 2020 as a result of the coronavirus lockdown.
A report from the Office for Budget Responsibility (OBR) bases the possible outcome on a scenario where the current coronavirus-related lockdown remains in place for three months, followed by a three-month period of a partial lifting.
It adds that unemployment would rise to 10% of the working population, but will ease off later in the year.
Public sector net debt also rises sharply, surpassing 100% of GDP during the year, and reaching the highest levels seen since World War Two.
Forecasters at the OBR were keen to stress this is 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 is likely to be.
The OBR has stressed that their figures are “not a forecast, as we have no way of knowing how long the most stringent public health restrictions might last.”
OBR chairman Robert Chote said: “Under the three-month scenario we estimate that public borrowing would be around £220bn higher this year than we estimated at the time of the Budget in March. That would take the overall budget deficit to around 14% of GDP, its highest level since the Second World War.
“But that should be a temporary hit. Although the longer the economic lockdown lasts, the greater danger there is that the future potential of the economy will be scarred by significant business failures and by the difficulties the unemployed face getting back into the labour market.
“That would translate into a higher structural budget deficit that wouldn’t disappear automatically as the economy recovered.”
A Treasury spokesman has admitted that the Government is working on the assumption that coronavirus will have a “very significant hit” on the economy.
“It’s fair enough to assume that we are operating on the assumption of a very significant hit to impact on the economy.
“But as the OBR themselves say, there is a huge amount of uncertainty in what they’re doing. So they say clearly that the impacts could be materially smaller or larger,” the spokesperson said.
He added: “We’ve already said that coronavirus is going to have a significant impact and that in spite of our unprecedented measures there will be hardship for people and businesses.
“What is also says (the OBR report) very clearly, including on its first page, is that the action the Government has taken will mean that the impact… that without that action, the impact on businesses, jobs and individuals would have been much worse with more people facing job losses.”
Rain Newton-Smith, CBI chief economist, said: “This makes for bleak reading and stresses the need for the right policies to support our economy through this crisis. The need for coordinated global action to rebuild confidence has rarely been greater.
“The Government will also need to work with businesses and many parts of civil society here at home, to create a plan to revive the economy once the lockdown is lifted.”
John Maude, chairman of the Midlands and East regional board at NatWest, said: “We know it’s an incredibly challenging climate for businesses to operate in.
“As our recent PMI for March revealed, both the manufacturing and services sector were affected as shops were forced to close while production was scaled back to align with a steep fall in new orders right across the West Midlands which facilitated a slowdown in business activity.
“We will continue to support businesses across Birmingham and the West Midlands over this period and we will work alongside the Government and our regional partners on supporting the regional economy in its future growth prospects.”
