The Furlough Scheme’s Changes May Cause Deeper Economic Damage

June 8, 2020

The potential recovery of the UK economy has faced yet another setback as job losses have deepened in the automotive and aerospace sectors. The furlough scheme, on the whole, was designed to stop companies from releasing their employees as their revenues were eliminated as lockdown kicked in. However, as the scheme goes on, Chancellor Rishi Sunak announced that employers will be asked to pay for 20% of furloughed workers’ wages.

This has significant potential to cause more economic harm than good, as the government looks to protect the public coffers by shifting at least some of the cost back to employers. Many companies, having not had any form of income for the past three months, will likely struggle to pay for even a fifth of their regular wage bill.

In order to try and avoid the financial damage this change could cause, many businesses will find it a lot easier to lay off employees rather than continuing to pay them.

Some Layoffs Already

Layoffs have already been seen, as car dealership Lookers announced it will cut up to 1500 jobs, and Aston Martin have announced that they will cut 500 jobs. Similarly, at-risk industries include the aerospace industry, as international flights have fallen significantly.

Airlines and car manufacturers have both suffered a severe fall in revenue, which means that being forced to pay a fifth of wages could threaten the financial security of their company. For the company’s survival, layoffs have become a necessity.

When it comes to investing, the instability of recent months remains in place. These financial events mean that investing low is far riskier than usual, as layoffs demonstrate just how unstable some of these companies have become.

Although investing in companies that are in a dip is typically a profitable strategy, there is a much greater risk in the current economic conditions of investments going under completely than there is usually.

It’s much more advisable to invest in companies that have been able to continue functioning throughout the crisis. Supermarkets and online retailers are likely to remain consistent, and don’t have the same risk of folding that you can see clearly in more affected sectors of the economy.