Coronavirus: Chancellor warns of 'severe recession' and 'more hardship to come' as unemployment spikes

Oscar Williams-GrutSenior City Correspondent, Yahoo Finance UK
Yahoo Finance UK
A Debenhams department store, boarded up and closed-down due to coronavirus, on Oxford Street in London. (Tolga Akmen/AFP via Getty Images)
A Debenhams department store, boarded up and closed-down due to coronavirus, on Oxford Street in London. (Tolga Akmen/AFP via Getty Images)

The UK chancellor has warned that Britain faces further economic hardship in the months to come, as new data shows spiking unemployment caused by the COVID-19 pandemic.

“We’re likely to face a severe recession the likes of which we haven’t seen,” Rishi Sunak told the House of Lords’ Economic Affairs Committee on Tuesday. “Of course that will have an impact on unemployment.”

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The comments came as the Office for National Statistics (ONS) said unemployment benefit claims jumped by 850,000 in April, taking the total to 2.1 million. It marks the highest claimant count since 1996 and should translate to an unemployment rate around 9%.

Sunak said he did not have a central forecast for peak unemployment but said it was likely to reach “double digit” percentage rates.

“Obviously, the impact will be severe,” the chancellor said.

Read more: UK jobless claims surged 69% as lockdown began

Sunak said the “question that occupies my mind… is what degree of long-term scarring is there on the economy”.

The Office for Budget Responsibility (OBR) is working under the assumption that the UK economy will be able to bounce back to full health after the lockdown is eased. However, the International Monetary Fund believes as much as 4% of the UK’s productive capacity could be lost due to firms going bust and job losses.

“The question is what do we return to… the jury is out,” the chancellor said.

Britain's chancellor of the exchequer Rishi Sunak. (Tolga Akmen/AFP via Getty Images)
Britain's chancellor of the exchequer Rishi Sunak. (Tolga Akmen/AFP via Getty Images)

Sunak said a longer lockdown would likely lead to a longer recession, and a longer recession would increase the degree of permanent “scarring.” He added that he does not expect an “immediate bounce back” even once the UK reopens.

The government has spent billions of pounds in recent months to try and limit the permanent damage to the economy as a result of the pandemic.

However the chancellor said: “I certainly won’t be able to protect every job and every business… no doubt there will be more hardship to come.”

Read more: 'War-time level deficits' as UK faces £337bn COVID-19 bill

Leaked reports have suggested the recent increase in government spending could push public borrowing above £300bn ($363bn) this year. The OBR has given a similar estimate.

Sunak said the deficit would be “significant by historic standards” but wouldn’t comment on specific figures. He said governments revenue for the year was currently “unknowable.” The cabinet would get a “clearer sense” of the deficit as tax receipts roll in over the coming months.

“Where public finances are after this moment is unclear at this moment,” Sunak said. “Clearly debt will be higher.”

He said it was “too early” to comment on what policy decisions would be taken to address the debt.

Read more: Crisis measures to cost UK government £123bn this year

The chancellor said the UK’s financial health would ultimately have been “considerably worse” without government intervention to support the economy.

“Medium term, what will matter is what’s the size of our economy,” he said.

Figures released by the ONS last week show economic output fell 2% in the first three months of 2020, slumping by 5.8% in March alone as the nationwide lockdown was introduced. However, just 1% of businesses surveyed said they had permanently gone out of business as a result of the shutdown.

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