The UK economy will shrink 11.3 per cent this year and not recover until the fourth quarter of 2022, official forecasts indicate.
The government’s fiscal watchdog predicts that the coronavirus pandemic will result in the UK’s economic output falling more than in any year since 1709, while unemployment is to hit 2.6 million by the second quarter of 2021.
Next year, GDP is forecast to grow 5.5 per cent, followed by 6.6 per cent in 2022 and 2.3 per cent in 2023.
By 2025, the economy will be 3 per cent smaller than predicted back in March, according to the Office for Budget Responsibility.
Announcing the figures and his plans for public spending, Rishi Sunak told the House of Commons: “Our health emergency is not yet over and our economic emergency has only just begun. Our immediate priority is to protect people's lives and livelihoods.”
The chancellor promised a "once in a generation investment in infrastructure" as the OBR forecast that borrowing would reach £394bn this year, the highest recorded in peacetime. Borrowing will not fall below £100bn in any year of this parliament, he said.
He also announced a pay freeze for millions of public sector workers, a move which his opposite number Annelise Dodds said would deliver a "sledgehammer" blow to consumer confidence.
The shadow chancellor accused the government of mismanaging public money on an “industrial scale” with its handling of billions of pounds of contracts for Personal Protective Equipment.
Earlier in the day, Mr Sunak warned his Cabinet colleagues that the OBR’s forecasts would make a “sobering read”.
The latest figures are worse than those the OBR published in April, when it forecast a record-breaking 10 per cent slump in GDP due to the lockdown followed by a very rapid bounce-back in activity in the second half of this year and next year, taking the economy back to its pre-crisis growth path.
In July, the OBR delivered a more pessimistic view, forecasting a 12.4 per cent fall with a recovery taking several years.
At that time, the OBR's "base case" projection was that unemployment was predicted to soar to 11.9 per cent - meaning 3.5 million people out of work - as the furlough scheme and support for self-employed workers came to an end.
The government's decision to extend the furlough scheme has helped keep the official unemployment rate substantially lower, at 4.8 per cent, up from 4.5 per cent before the pandemic.
The economy is expected to enter a double-dip recession in the final part of the year after a resurgence in the virus necessitated more stringent restrictions in each of the UK's four nations.
Businesses in England will find out on Thursday which of three tiers of restrictions they will be under when the national lockdown ends next week.