Inflation has dominated global economic policy since 2022, largely because of the Russian invasion of Ukraine and COVID-related disruptions in the global supply chain. The resulting domino effect of high inflation and low growth has led to a weak global macroeconomic outlook for the foreseeable future.
Jersey, meanwhile, has largely remained resilient and insulated from some of the shock. This is primarily due to the positive impact of interest rate rises on much of the Island’s financial services sector and its strong position before the shock had hit.
In this piece we will take a closer look at the latest report from Jersey’s Fiscal Policy Panel (FPP), which lays out the wider macroeconomic outlook and its impact on the Island’s economy – after what many can agree has been a tumultuous few years.
Weathering the Storm
When COVID-19 restrictions were initially put in place back in 2020, many major economists debated how long a likely postpandemic recession would last. Specifically, they were split over whether the economic recovery would be ‘V’ or ‘U’ shaped– referring to the trajectory of GDP, employment and other economic variables over time.
Those in the ‘V-shaped’ camp were initially proved correct. The UK – after a more than 20% decline in GDP mid-2020 – saw output return to pre-pandemic levels by the end of the following year. Jersey largely mirrored this bounce back – seeing a decline in employment in the six months to June 2020 but which then exceeded pre-pandemic levels by the end of 2021.
Of course, further economic challenges have since emerged. To combat spiralling inflation the Bank of England has been steadily increasing its interest rate for more than 12 months, having recently reached the highest level in 15 years. This has been mirrored in other major economies such as the US, Canada and the Eurozone.
Against this backdrop, the International Monetary Fund (IMF) has predicted the global economy to grow by 2.8% in 2023, which is weak by historical standards. For advanced economies the outlook is poorer, with a 1.3% expected growth rate. Worse still, the UK economy is expected to contract by 0.3% this year.
A Silver Lining
Forecasts for Jersey, meanwhile, are more bullish. The Island’s economy is intrinsically interconnected with the wider global economy through its dominant financial services sector – it being the significant driver of local Gross Value Added (GVA).
The rising interest rates, while contributing to reduced economic growth elsewhere, have led to accelerated profitability in Jersey’s banking sector. This in turn has led to strong growth in the Island’s corporate tax revenues in the short term.
There are, however, indications that inflation in the UK has reached its peak. Wholesale energy prices have begun to fall and are expected to come down sharply in the short to medium term. The FPP expects Jersey’s RPI to follow a similar path, having peaked earlier this year at 12.8%, before steadily falling. Correspondingly, in their most recent report, the Income Forecasting Group have tempered their expectations on the future growth of profitability within the banking / financial services sector – moving the forecast down from that provided in summer 2022.
Profits Driving Employment Growth
This temporary boost in profitability in financial services has led to higher employment and earnings growth in the sector. While registered unemployment in the Island remained low at 670 in December 2022 – with most sectors reporting vacancies or difficulties in filling vacancies – employment in financial services is assumed to rise consistently over the coming years.
Indeed, evidence from Jersey’s labour market and businesses suggests the Island’s economy recovered well from the COVID-19 pandemic. The number of local people registered as actively seeking work – a key measure of unemployment – has remained at the lowest levels seen since comparable figures began in 2008.
Furthermore, the number of jobs is back to pre-COVID levels and vacancy rates are high. This points to a local labour market at – or very close to – full employment. This does present a few disadvantages, however, as the lack of spare capacity in Jersey’s workforce presents a challenge for several sectors. The construction industry faces a shortfall of workers, while accommodation and restaurant operators have reported difficulties in recruiting staff.
Despite the optimism, there are several important risks to be mindful of further down the line. These include an ageing population, productivity challenges and the impact of rising interest rates on households. All of these threaten to impact the Jersey economy at various points in the future.
A lack of affordable housing poses a risk to economic growth and productivity. Not only is individual household spending reduced due to the rise in interest rates, there is also risk of reduced migration of key workers – as the high cost of housing makes the Island less attractive to potential migrants.
This reduced net migration and lower local fertility pose a challenge for an Island with an increasingly ageing population. Older demographics will likely lead to higher expenditure on health and may require more financial support where individuals have not saved enough for their retirement. It is likely, then, that the Government of Jersey will at some point have to consider increasing the retirement age and/or social security contribution rate to ease this societal pressure.
With all this in mind, it seems Jersey’s economy remains in a good position to weather the current macroeconomic storm. Much like other advanced economies, the Island must seek to achieve a delicate balance of addressing short-term pressures whilst maintaining long-term sustainability – in order to keep its economy healthy in the decades to come.