The UK will be one of the worst-hit big economies in the world in the first three months of this year, according to a new forecast, as the expected economic performance for 2021 was downgraded.

The UK’s gross domestic product (GDP) will only rise by 3.4% across the year, denting hopes of a so-called V-shaped recovery from the economic harm caused by the Covid-19 pandemic.

The forecast, from the National Institute of Economic and Social Research (NIESR), is a downgrade from the think tank’s previous estimate of 5.9% growth during the year.

It said that the economy will continue to shrink during the current quarter, which started with different types of lockdown in place across the whole country.

Early indications are that the lockdown in the first quarter is having a larger impact on activity than in November, but a smaller impact than the spring 2020 lockdown

Across the three months, the UK’s GDP will be the worst hit of any of the Group of Seven (G7) large economies in the world.

The forecasted drop of nearly 9% in the quarter would be more than twice the expected decline in Japan, the second-worst hit country in the G7, NIESR said.

“Early indications are that the lockdown in the first quarter is having a larger impact on activity than in November, but a smaller impact than the spring 2020 lockdown,” it said.

The economic shock means that as many as 2.5 million people in the country could be unemployed before the end of the year, unless the Government acts to extend the furlough scheme to support jobs.

More than £46 billion has been paid out in furlough cash since the scheme launched in May, supporting around 10 million jobs.

However, the scheme is due to come to a close at the end of March this year.

NIESR said that in its “main-case forecast scenario, unemployment is expected to rise significantly following the end of these schemes in April, reaching 7.5% or 2.5 million people by the end of the year”.

It added: “To prevent a rise in unemployment of the magnitude of the forecast, and to limit the economic and social ‘scarring’ from the public health crisis, the Chancellor should soon announce policies to support the labour market beyond April.

“The pace and path of the recovery will depend on state-contingent and targeted policy interventions.”