Morgan Stanley predicts Sunak will extend furlough scheme

Chancellor Rishi Sunak is likely to extend his furlough job support programme beyond October to avoid major economic scarring from a surge in unemployment, Morgan Stanley said.

The economy performed solidly in July and August but there is a risk of an "autumn payback", Morgan Stanley economists Jacob Neil and Bruna Skarica wrote in a note to clients.

The number of furloughed workers is still high and one in four workers on furlough thinks they will lose their job if the scheme ends in October. That would push unemployment up to almost 9%, the economists said.

September could mark the start of a surge in job losses, Neil and Skarica said. Rising unemployment would reduce spending power for jobless workers and hit consumer confidence generally, they warned.

Sunak is under increasing pressure to extend the furlough programme. Opposition MPs repeatedly called for an extension at prime minister's questions with Labour asking the government to target badly hit industries such as aviation and hospitality.

The economists said the UK faces "double trouble" from Brexit and Covid-19 in the remainder of 2020. They expect more fiscal support aimed at investment as well as more action from the Bank of England - and an extension of furlough.

"The focus is on whether to extend furlough, likely in a less generous and more targeted format," Neil and Skarica wrote. "Given modest cost and potential for material scarring from an October furlough cliff edge, we now expect extension."

A six-month extension would cost about £3bn and would probably take the UK up to the point when a vaccine is widely available, the economists said. Other European countries have already extended and the risk of major damage from unemployment is high, they added.