The UK economy is not heading for a quick recovery from the turmoil caused by coronavirus, the chancellor has warned as figures showed a surge in jobless benefit claims and that 8 million workers were on the government’s furlough scheme.
Giving evidence to the Lords Economic Affairs Committee on Tuesday, Rishi Sunak said it was “not obvious that there will be an immediate bounce back”, noting that even if firms reopened, households might still be reluctant to start spending again.
“In all cases, it will take a little bit of time for things to get back to normal, even once we have reopened currently closed sectors,” he said, describing the current slump as “a severe recession the likes of which we have not seen”.
New official figures on Tuesday showed a record-breaking jump in unemployment benefit claims in April, with an increase of 856,500 in the month, by far the largest rise since records began in the 1970s.
The Office for National Statistics also reported that job vacancies slumped by a fifth, or 157,000, in the most recent three months, again the largest fall since records were made, and an early indicator of how the lockdown imposed at the end of March has kicked the legs out from under the UK jobs market.
The Treasury’s official forecaster, the Office for Budget Responsibility (OBR), projects the overall jobless rate to peak at 10 per cent, similar to the level during the 2008-09 financial crisis.
But experts say that it would go far higher without the government’s jobs furlough scheme, which keeps beneficiaries technically employed.
There are now 8 million UK workers on furlough according to ministers, which accounts for a full quarter of the workforce.
The Bank of England has projected a GDP fall in the second quarter of 2020 of 25 per cent and for a contraction over the full year of 14 per cent, which would be the worst since 1706.
The chancellor’s remarks on Tuesday echo an increasing mood among economic forecasters that early hopes of a rapid recovery are now looking unlikely to be realised.
“I think you’re likely not going to see the economy bouncing back to where we expected it otherwise to be by the end of the year … but instead a rather slower recovery,” the head of the OBR, Robert Chote, told the BBC over the weekend.
In its most recent report, the Bank of England projected that the UK economy would not recover to its previous path until the second half of 2021.
The bank also listed a number of reasons why there could be long-lasting economic “scarring” from this crisis, such as firms cutting investment in the face of profound uncertainty or workers losing their skills due to unemployment, although the bank’s governor, Andrew Bailey, added earlier this month that “we judge these effects to be relatively small”.
The OBR currently expects government borrowing this financial year to come close to £300bn, or around 15 per cent of GDP, taking the national debt to GDP ratio to 96 per cent.
When asked about the prospect of post-crisis austerity to bring down debt, the chancellor suggested he would prioritise growth of the economy, but that the degree of long-term scarring would also be important.
He said: “Medium term, what will matter is what’s the size of our economy – what kind of structural deficit or not are we looking at as a result of any scarring that might have happened?”
“All economic forecasters and economists would agree the longer the recession is, it is likely the degree of that scarring will be greater.”
Referring to his furlough scheme and government-guaranteed loans for companies, he said: “The actions I’ve taken in recent weeks and months I hope will limit that scarring and limit the impact on our medium-term public finances.”
Garry Young, the deputy director of the National Institute of Economic and Social Research think tank, said the “economic fallout” from Covid-19 was gradually becoming clearer.
“Many businesses are under severe financial pressure and are only able to retain staff because of the government’s furlough scheme. Despite this, claimant unemployment rose above 2 million in April, the highest level since 1996, and it is very likely that we will see falls in pay in the months ahead.”