Report: Economy likely to suffer long-term scarring

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In a report presented to Treasury Minister Susie Pinel, the Fiscal Policy Panel has warned that it believes the Island’s recession last year will be deeper than previously expected, with the economy shrinking by 9.7%, rather than 7.6%, as was last indicated, with banking profits hit by record low interest rates.

And the panel’s updated economic assumptions document, which will be used to prepare the Government Plan for 2022 to 2025, advises that the environment remains ‘highly uncertain’.

It adds: ‘Jersey has set out a clear roadmap for the lifting of Covid-19 restrictions. This “reconnection plan” is made possible by the progress in administering vaccines – with over half of Jersey’s population now having already received at least one dose – and this should lead to a continued improvement in economic conditions.

‘However, it is likely that the pandemic will have caused long-term “scarring” effects on the economy. This means that there is a risk Jersey will not recover to the level of economic output expected before the pandemic in the years covered by the Government Plan.’

The reports says that finance, the Island’s largest sector, has generally coped well with the pandemic, except for the banking sector where profits have been hit by reduced interest rates, creating a ‘sharper-than-expected fall in profits’.

It adds that the uptake figures for the government’s co-funded payroll scheme, which subsidised staff wages for struggling firms, indicated the economy hit difficulties during the winter.

Around 7,000 jobs were supported by the scheme in January, compared to 5,000 in November. The peak figure during the pandemic was 16,000 in April 2020.

The FPP predicts that employment will recover to 2019 levels next year and house-price growth, which unexpectedly spiked during the past year, will slow down.

The report adds: ‘The overall impact of the revisions to the forecast are a further downgrade to the estimate of GVA [Gross Value Added – the size of Jersey’s economy] in 2020, to around a 10% fall – the largest decline in GVA in the period over which a consistent set of data are available (since 1998).

‘The recovery is forecast to be more gradual, determined in part by the increase in financial services profits not strengthening until towards the end of the forecast.

‘While more data is now available for 2020 there still remains considerable uncertainty around the size of the downturn, which will not become clear until much later this year.

‘The recovery in 2021 and onward is dependent on both the speed and effectiveness of the vaccine rollout and on the future path of interest rates and their impact on banking profitability.

‘However, at this point the panel continues to advise that Jersey’s economy is likely to remain smaller in the long run than was forecast ahead of the pandemic.’

The FPP is made up of economists Dame Kate Barker, Francis Breedon and Richard Davies.

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