A leading investment bank has predicted the government will extend the furlough scheme in an attempt to slow the “large and rapid deterioration” of the jobs market.
Morgan Stanley said that, given Britain’s relatively slow transition off furlough, it expected an extension to the scheme, albeit in “a less generous and more targeted format”.
The coronavirus job retention scheme was launched by Rishi Sunak, the chancellor, in March to enable employers to lay off staff temporarily, with 80 per cent of their wages being paid by the taxpayer up to £2,500.
It is being phased out, with employers gradually taking back responsibility for paying furloughed staff and the scheme due to end next month.
Morgan Stanley economists Jacob Nell and Bruna Skarica cited the “comparatively modest” cost of extending the scheme, estimating that a six-month extension, by which time they assume a vaccine will be widely available, would have a net cost of £3 billion.
They said the decision by EU countries such as France and Germany to extend furlough schemes could help sway the government to follow suit. “We see a risk of material scarring from an October windup, which could we think add several percentage points to unemployment and delay recovery to pre-Covid levels significantly.”
Despite the effectiveness of furlough in mitigating job losses, the economists said the “underlying picture in the labour market data was still one of a large and rapid deterioration”.
They said there were a possible 130,000 redundancies to come, the worst affected sectors being non-food retail, car and aviation manufacturers and restaurants and hotels.