Rishi Sunak said the nation was heading into a "severe recession" and it's "not obvious there will be an immediate bounceback" once lockdown restrictions are eased more fully.
Speaking to Parliament, Sunak told MPs that the United Kingdom should not rely on a "V-shaped" recovery which some predicted when the country first introduced lockdown measures in March.
The Chancellor suggested that the most effective way to help business would be to let them reopen.
But Mr Sunak said it was not clear how long the effects on the economy would last.
Sunak stated that young people would be the worst affected by job losses amid the pandemic, his assertions supported by a report published by the Resolution Foundation think tank on Tuesday.
Claims soared by a record 846,500 to 2.1 million in April - the UK's first full month in lockdown - according to the Office for National Statistics.
Mr Sunak told the peers that the costs of the government bailouts so far was estimated at £100billion.
The Chancellor also revealed the level of "scarring" to the economy is what "most occupies my mind", as he admitted the "jury is out" in terms of what the health of the economy will be once the lockdown is eased.
'Those things will all take time. "So I think, in all cases, it will take a little bit of time for things to get back to normal, even once we've re-opened now closed sectors", he said.
"Through April, though, there were signs of falling employment as real-time tax data show the number of employees on companies' payrolls fell noticeably, and vacancies were sharply down too, with hospitality again falling steepest".
"Of course that will have an impact on employment".
"We all would hope that it (recovery) is as swift and strong as it can be".
The hancellor said: "Unlike some countries across Europe, who had done this before so they systems set up, we didn't so we had to design as we went".
"So we do need to look at how they manage that process and give them some flexibility".
The Chancellor highlighted the threat of "scarring" as he said it would "take time" for people to get "back to normal" even after the lockdown ends. Economists said the figures would have been far higher without the Treasury's furlough wage subsidy scheme.
Fiona Cincotta, financial market analyst at Gain Capital, said: "To put this into context, at the peak of the financial crisis jobless claims hit a high of 136,000".
But he hinted that the scheme covering up to 80 per cent of usual monthly income for the self-employed might not be continued past June.
"This figure is going to get worse before it gets better".