NIESR also says impact of coronavirus will lead to spike in unemployment to above 10%

Britain’s economy is likely to lose out on £800bn of income over the next 10 years as the lockdown and a spike in unemployment leave deep scars on the private sector, a leading thinktank has warned.

The National Institute of Economic and Social Research (NIESR) said it expected the economy to bounce back next year, but not to its previous level and with the unemployment rate still above 5% after hitting 10.5% this year.

A second peak in the coronavirus outbreak or a prolonged shutdown into the summer would add between a third and a half more to the loss of income this year, NIESR added.

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A sustained and consistent fall in daily deaths from Coronavirus

Reliable data to show that the rate of infection is decreasing to manageable levels across the board

Operational challenges including testing and personal protective equipment (PPE) are in hand with supply able to meet future demand

Confident that any adjustments to the current measures will not risk a second peak of infections that overwhelms the NHS

In its twice yearly report, the thinktank said the efforts of the government to limit the economic impact of Covid-19 with loans, grants and guarantees to thousands of businesses would send public sector debt to 95% of GDP next year, 12 percentage points above its current level.

“The government’s announced measures to limit the long-term economic effect of Covid-19 have a direct cost to the exchequer of about £75bn in our main-case scenario. Borrowing is likely to rise above £200bn in 2020–21,” it said.

While analysts have expected an increase in public debt as a ratio of national income to near 100%, the prediction of an increase in unemployment to above 10% is gloomier than many other forecasts following a reluctance so far among employers to make staff redundant.

The thinktank said it found it difficult to make a forecast for the economy while the full impact of the coronavirus pandemic on the UK and the rest of the world was still unknown, but estimating future growth provided a guide to the potential gains from managing the crisis with well-targeted state support schemes.

“There is massive uncertainty about how long and how severe this crisis will be. For our reassuring main-case forecast scenario to come true it is necessary to believe that the complex network of relationships that make up the economy can be restored after the lockdown without any significant long-term damage,” said the NIESR deputy director, Garry Young.

“So far the signs are promising, but the most significant challenges are likely to come as we approach the end or winding down of the lockdown and the supportive schemes are withdrawn. In those circumstances, the government schemes will need to be adapted to help businesses survive in a partially recovered economy.”

The lockdown has pushed down the UK’s national income (GDP) by 30% and will leave the economy 7.5% smaller at the end of the year than when it started. Next year GDP will increase by 6.8%, NIESR said.

The global economy will shrink by 3.5% compared with just 0.5% following the financial crash in 2008, before bouncing back by 7% next year.

Earlier this month the International Monetary Fund said the global economy would shrink by 3%.

• This article was amended on 29 April 2020. An earlier picture caption misnamed The Shambles in York as “Shambles Street”.