Minister confident in Jersey... as UK gets dire economic forecast

Thursday 02 February 2023

The UK might be facing the bleakest two years of any advanced nation according to a new forecast - but Jersey's Treasury Minister is confident the island's economy and main breadwinner, finance, will remain strong in 2023.

The International Monetary Fund predicted this week that the UK's economy will contract by 0.6% this year, rather than grow slightly as previously forecast.

The UK is expected to be the only country to shrink next year across all advanced and emerging economies, including sanctions-hit Russia.

But the politician in charge of public spending in Jersey said things were different, although the island was still facing the ‘headwinds’ of rising costs, high house prices and recruitment difficulties.

“We know that last year, the economy performed well. We’re doing our year-end processes now but it won't surprise us if those numbers are good numbers," he said.

Pictured: "Facing the economic headwinds, we cannot grow our expenditure line nor think about growing it too much in 2024 and 2025," said Treasury Minister Ian Gorst.

“What happens in the UK does affect us, but we can be resilient to it to some extent, because of financial services.

“However, we can expect to see interest rates rise, we’ve got big increases in inflation and the Fiscal Policy Panel [which provides independent economic advice to the Government] say that those inflation levels may not fall off as quickly as they had first predicted. 

“That is why we’ve made interventions to islanders, such as increasing tax thresholds by 12%, and twice raising income support components.”

He added: “Throughout 2023, we've got to be mindful of the cost-of-living crisis and whether there needs to be further interventions; some of that will depend on interest rates and continuing levels of inflation. 

“Facing the economic headwinds, we cannot grow our expenditure line nor think about growing it too much in 2024 and 2025.”

Focusing on the importance of financial services, Deputy Gorst said: “Because it is such a strong component of our economy, rising interest rates can increase productivity, and although it’s theoretical productivity, it does increase government coffers.”

These will get a further boost today, with the Bank of England raising interest rates rise from 3.5% to 4%. 

This is because Jersey's main industry is a deposit taker so its funds and accounts increase in value when interest rates go up. The Government's own savings - such as its £1 billion Strategic Reserve - will also receive an injection.

Deputy Gorst said: “All the indicators in the [most recent] Business Tendency Survey show that financial services is confident about 2023. But there are these headwinds, such as he continuing housing crisis and difficulties around recruitment.

“But ministers are thinking about them and working on solutions to these issues. 

“Even if the economy is performing strongly, if islanders don’t feel the benefit of that in their pockets, then that’s a demotivating factor and it makes life difficult. So we need to be mindful of that and make sure that we're ready to intervene, if necessary.”

Tom Holvey is the Government’s Chief Economic Adviser. Like the Treasury Minister, he said that Jersey was in a better position than the UK.

He said: “I have been here nine months now and it surprises me how much people view the Jersey economy through the lens of what’s happening in the UK, but the two economies are not necessarily aligned.

“Yes, the Jersey economy is closely linked, particularly from a monetary policy point of view, and we obviously have the same currency and we import a lot of inflation.

“But our economy is stronger and there have not been the same shocks that have hit the UK economy, such as its October budget."

He added: “The UK economy is predicted to be on a downward trend for the next 18 months but the FPP say that the island is resilient and well positioned to weather the UK storm.

“Importantly, we have a different debt profile, which reduces our risk immensely, and with rising interest rates, it is actually a win for financial services. 

“And although rising rates impact people on variable mortgages, most homeowners in Jersey are on fixed rates so the impact is not felt so badly, or is delayed.”

He added: “Inflationary pressures are not as acute in Jersey, even with a high headline figure. A significant amount of UK inflation has been in retail gas, which we do not have.

“The IMF and other economic institutions have said that 2023 will be tough; none of this is a surprise and we in Jersey are relatively well insulated. 

“And the forecasts now are not as bad as they were three months ago, when it comes to global recession.

“Yes, the UK is the worst performing advanced economy, but everyone expected that to be the case. If you know what is coming, you can always plan ahead.”

Also responding to the IMF forecast, Joe Moynihan, CEO of Jersey Finance said: “Jersey has clear and well-established links with the UK and naturally market conditions in the UK will have some impact on business flows in Jersey."

Pictured: Joe Moynihan, Chief Executive Officer at promotional body Jersey Finance.

He continued: “However, Jersey’s finance industry has for some years developed a strategy of diversification, and as a result has exposure to multiple global markets, which helps mitigate risk. 

“That is manifested, for instance, through the growing levels of funds business with the US, which has more than doubled over the past five years, and through our evolving South East Asia strategy and our new presence in Singapore.”

“It’s also worth noting that the Business Tendency Survey figures reflect optimism in the industry, with a positive outlook for both future business flows and recruitment. 

“Nevertheless, the UK’s outlook is a reminder that there is no room for complacency, we are operating in a highly competitive market, and as an industry it’s vital we continue to maintain our momentum and our visibility in our key overseas markets.”