Morgan Stanley Expects U.K. U-Turn on Furlough Plan Extension

(Bloomberg) --

The U.K. will extend its furlough program to avoid long-term scars to the economy from the pandemic, according to Morgan Stanley, despite the government repeatedly ruling out that more aid is on the cards.

The extension, partly inspired by other European nations already taking similar steps, will be “less generous and more targeted,” economists Jacob Nell and Bruna Skarica wrote in a report published Friday.

They estimate six-month extension would have a “comparatively modest” net cost of 3 billion pounds ($4 billion).

Such a decision would be welcomed by U.K. business groups and many politicians who have warned Prime Minister Boris Johnson and his finance chief, Rishi Sunak, that winding down support too quickly risks a massive spike in unemployment.

But it would also mark another policy U-turn by a government accused of mishandling its response to the pandemic, causing one of the highest death rates in Europe and a deeper recession than in many advanced economies.

Nell and Skarica say the most worrying development for the economy is the “stubbornly high” number of workers still on full-time furlough. On top of that, underlying data point to a large deterioration in the labor market.

“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,” they wrote.

©2020 Bloomberg L.P.