Uncertainty and upheaval are now the norm as economies worldwide grapple with a turbulent mix of geopolitical fragmentation, ageing populations, technological disruption and the transition to net zero. International finance centres (IFCs) need to play a key role in attracting, managing and channelling capital towards projects and initiatives that drive economic viability and regeneration — from supporting specific challenges such as the green transition through to broader UN Sustainable Development Goals. The role of IFCs is evolving and this also has implications for Jersey’s economic outlook.
After four years of disruption stretching from pandemic lockdowns and supply chain breakdowns to surges in inflation, interest rates and geopolitical instability, the global economy would benefit from some stability. Unfortunately, the road ahead looks equally uncertain.
While interest rates may edge down in the short-term, there is now a growing consensus that they will eventually settle at levels much nearer historic norms than the ultra-low rates of the 2010s. In the absence of ‘cheap money’, many businesses and countries will find it harder to secure the necessary capital needed to modernise and compete.
Geopolitical tensions are adding to the challenges by triggering economic fragmentation. Tariffs and trade restrictions are increasing and economies are forming into political and regional blocs. This retreat from globalisation will likely weigh on economic growth.
Shifting Demand in an Ageing World
Further pressure on economies is coming from ageing populations. Ageing has often been viewed as primarily an issue for the most mature economies, especially Japan and Europe. However, it is fast becoming an economic challenge worldwide. For example, China’s working age population is expected to fall by nearly a quarter by 2050.
As birth rates decline and populations grow older, the working age population falls and the dependency ratio (non-working to working people) rises, the result is likely to be a major constraint on the productive capacity of many economies.
In parallel with the pressures on production, ageing populations could lead to marked shifts in consumption. With people routinely living to 90 years and beyond (though often not healthy years), we are likely to see a big rise in demand in areas ranging from holidays and leisure in the active early years of retirement to social and nursing care later in life. This is because ageing populations shift economies from being savings-based to consumption-based as retired people spend more and save less, while fewer workers and lower returns on savings reduce overall savings rates.
This will likely put further pressure on already tight labour markets as sectoral employment shifts away from higher value industries (like financial services) into those that meet the changing consumption needs of an older population.
Rethinking Tech Assumptions
Will the productive potential of new technology – led by advances in generative artificial intelligence (GenAI) – make up for the drop in working age populations and boost output and growth? Probably not in the short to medium term.
Following the initial hype and hope, there is a growing realisation that GenAI and AI more broadly need a lot more time to deliver the anticipated uplift in economic productivity. The reasons range from consumer and regulatory wariness to the difficulties of automating manual tasks requiring a high level of human skill and judgement.
Race to Net Zero
From an environmental perspective, many countries and businesses have made ambitious net-zero commitments, which consumers and investors increasingly expect despite pushback from some stakeholders. However, progress on decarbonisation is falling dangerously behind schedule. The challenges include high costs, competing priorities, a lack of skills needed to implement changes and concerns over accusations of greenwashing or failing to meet new regulatory requirements − all of which underline the need for further investment.
Slowing Global Growth
So what is the aggregate economic impact of these trends and challenges? Overall, return and growth are likely to be harder won. As Figure 1. highlights, the OECD expects annual global GDP growth to halve in the coming decades (around 3% now to 1.5% by 2060). However, there are also significant opportunities. With green innovation advancing and the OECD estimating that the transition will require $6.9 (£5.2) trillion of capital a year, the transition to net zero is a clear case in point.
The Evolving Role of International Finance Centres
IFCs play a key role in the global economy, providing the infrastructure and know-how to facilitate efficient and effective cross-border investment and trade.
Their role as conduits of capital is likely to evolve significantly in response to the challenges described in this article and the heightened need for stability, investment and expertise required to address them. IFCs need to both ensure that their jurisdictions are not overly exposed to sustainability risks, as well as to support and enable the financing of sustainable development.
Further, in a global economy in retreat from globalisation, IFCs will also need to navigate increasingly complex regulatory environments and adapt to differing regional standards and policies.
Looking ahead, IFCs will need to prioritise channelling capital to net zero transition, developing sustainable finance solutions and creating the innovative financial products needed to meet the growing demand for impact and positive environmental, social and governance (ESG) orientated investment.
Jersey Economic Outlook
Clearly, Jersey is not immune to the challenges faced elsewhere, from ageing to the impact of climate change. So how does Jersey fit into this shifting global landscape?
In the medium term, Jersey’s economic outlook is relatively bright. The Island has a growing role in the movement of capital globally, with an average of £1.4 trillion of capital intermediated through Jersey between 2017 and 2020. This is estimated to have supported more than £170 billion of global economic output (0.27%) and over five million jobs worldwide.
In an unstable world, Jersey offers the solid foundations of political stability and a respected regulatory framework. This is especially important as investors look for stability in a fractured and frictional global economy.
While the world as a whole is becoming more economically and politically fragmented, Jersey continues to be outward looking, seeking to expand its international connectivity and reach. This includes a number of bilateral investment treaties which have been signed − or are in negotiations − and nearly 30 double taxation agreements. These both strengthen economic partnerships and provide greater certainty for individuals, investors and businesses.
From investment in digital infrastructure and tech skills to providing a test-bed for new ideas, Jersey is increasingly creating an economy that is innovative, resilient and international. It is also investing in the affordable housing, sustainable infrastructure and the social and health care needed to address the impact of both climate and demographic change, all supported by relatively strong public finances.
Looking ahead, the Government of Jersey will need to continue investing heavily in the Island’s economic development if Jersey is to maintain living standards and to deliver on the aspirations set out in its Strategy for Sustainable Development.
Opportunities Open Up
So looking ahead, the global economic outlook is mixed. There are also societal and environmental challenges that need to be addressed. Yet with the challenges come opportunities. Jersey is well positioned as a stable partner in an unstable world economy.
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