Covid hit on economy predicted to be 9%

This is larger than the contraction experienced during the 2009 global financial crisis and it says there will be a record deficit at around 7% of GDP.

It will take until early in 2022 for the economy to return to 2019 levels, it believes, with the rate of unemployment not falling to normal levels until at least 2023.

The rating agency has affirmed Guernsey’s AA-/A-1+ credit rating with a stable outlook.

As well as the impact of Covid-19, it also warns that Guernsey, so dependent on the financial services sector, remains vulnerable to the level of access that the

UK secures to the EU after Brexit and any competition from the UK itself as it changes tax and regulation to become more competitive.

‘A significant stimulus package aimed at protecting businesses and saving jobs, alongside revenue losses, will cause Guernsey’s general government deficit to widen to about 7% of GDP in 2020,’ Standard & Poor’s report said.

‘Government support to the economy comprises an expansive payroll co-funding scheme, small business grants, additional health care spending, loan guarantees, and several tax deferrals.

‘While several of these measures are likely to be withdrawn by 2021, we expect the pandemic to cause some economic scarring that, in turn, is likely to have a multi-year effect on public finances.

‘We project an average deficit of about 2% over 2021-2023, compared with the largely balanced budget that we anticipated over the same period at the time of our previous publication in January 2020.’

Guernsey has secured up to £225m. in borrowing to fund what was described as ‘extraordinary spending’.

S&P’s central scenario on the economy is that it will show above-trend growth in 2021 when temporarily paused activity resumes.

It expects sizeable fiscal deficits to lead to a significant ramp up in government debt to 18% of GDP by end-2020 from about 10% at end-2019. This would break the government’s policy to keep debt below 15% of GDP, but is still considered a low level by the ratings agency.

It warns that the island will feel the loss of the UK’s influence in Europe following Brexit.

‘Following the UK’s departure from the EU and at the end of the transition period, the Channel Islands will enter a Customs arrangement with the UK, binding them to its external tariffs. An adverse tariff agreement for the UK that weakens its terms of trade in goods would also hinder Guernsey.

‘If the UK and the EU cannot agree on the terms of their future relationship, and the UK falls back to trading with the EU on World Trade Organization norms, Guernsey is likely to be exposed to supply-side disruptions, given that most of its imports are routed through the UK.

‘We understand, however, that the authorities have contingency plans in place to cope with such an event. In our opinion, the effectiveness of such plans could eventually depend on considerations outside the authorities’ control, such as the length of any potential disruptions and the UK’s preparedness.’

Economic growth prospects until 2023 are likely to remain pressured, it said.

‘Guernsey is already a third country to the EU, but we anticipate that the UK financial sector’s less favourable access to the EU following Brexit will likely weaken prospects for the corresponding sector in Guernsey.

‘Although Guernsey’s financial sector has a geographically diverse funding base, many of its clients originate from UK referrals.’

S&P’s says that despite the expected sharp contraction due to Covid-19, the island’s fiscal buffers remain very substantial.

‘Our ratings on Guernsey are based on our view of the island’s strong and flexible institutions, wealthy economy, and considerable fiscal buffers. These strengths are offset by the external risks to Guernsey’s economy and policy making framework, and its lack of meaningful monetary flexibility.’

S&P predicts GDP per capita will fall from $68,900 last year to $62,700 this.

It believes the economy will bounce back with 5.5% growth next year and 2.5% in 2022.

Unemployment will hit 7% this year, up from 2.7% in 2019, and fall to 4% next year, 3.2% in 2022 and 2.9% in 2023, according to its analysis.