Weathering the storm

Guernsey's economy did expand in 2013, but growth was very weak at 0.5%. Although the UK economy grew by 1.7% in 2013 (Jersey's figures are not published until mid-September), any growth in this environment is positive next to the stagnation Europe is enduring.

Indeed, what is more remarkable than looking at one year in isolation is the picture that has emerged over the last six or seven years since the financial crisis began. The figures indicate that the island has in fact escaped the worst of the financial crisis and has performed incredibly well.

Guernsey has suffered only one year of negative growth since 2005, with every year since then recording decent growth, with the exception of 2012 and 2013, when it was lacklustre. The worst recession in living memory has mercifully skirted around us so far, with only the last couple of years proving to be more difficult. Harder times have come to us later but with less intensity.

While the UK's economy has only just returned to its pre-crisis level in 2014, Guernsey's economy took less than three years and was larger in 2010 than 2007, growing every year since. Guernsey's economy in 2013 was nearly 6.5% higher than 2007. The comparison is stark. The UK may be growing strongly now, but it has much more to catch up.

Spare a thought also for our poor comrades across the water in Jersey, whose economic performance has been truly horrendous and throws into blunt relief our recent economic superiority. The facts speak plainly for themselves. Jersey's economy has declined for the past five years (latest figures available are 2012). Its economy has shrunk by 16% during that time. It is probably still smaller now than it was in 2007. The finance sector over there has contracted by a staggering 31%. Jersey's standard of living has fallen by 21% (although it is still the envy of most of the world).

Guernsey has certainly come off best so far, but there is naturally no cause for complacency. Jersey is counting the cost of an over-dependence on its finance sector, which is now smaller than at any time since 1999. Jersey has been especially reliant on the banking industry, which has been hit hardest by the financial turmoil and low interest rates. We must never allow something similar to happen here and must continue to search for alternatives to the finance sector.

Indeed, the output of the finance sector in Guernsey fell by 1.3% or £10m. in 2013 and now represents 35.7% of the economy. It has been declining for some years. At the same time, output from the non-finance sector increased by 0.5% or £9m. in 2013 and accounts for 60% of the economy.

The balance is shifting, slowly and subtly, although finance remains the fulcrum for everything else and must be nurtured.

The strongest growth in 2013 was enjoyed by the legal and business services sectors, which are broadly dependent on the finance sector. It is interesting that these sectors have expanded while finance has contracted and perhaps demonstrates the economic resilience of the legal sector and further outsourcing to the business services sector.

The retail and horticulture sectors suffered the most in 2013, enduring relative declines of 7.2% and 21.9%. The retail performance reflects the fragility of the local consumer, buffeted by declining wages and positive inflation, while the horticulture sector has been adversely affected by the withdrawal of LVCR.

The construction sector expanded by 3.8%, a robust performance after many difficult years, and because it is often a leading indicator may be a sign of an improving economic environment. The output of the public sector was broadly flat, which is mildly encouraging as it means a smaller proportion of the overall economy (and therefore a larger private sector) and indicates improving productivity as employment declined.

Wages fell during 2013 by 0.8%, confirming the economic weakness during the year and placing the consumer under pressure as the supply of labour outstripped its demand. Meanwhile, profits increased by 0.8%, underlining the greater economic power of companies in relation to workers as higher profits come at the expense of wages and firms strive to increase productivity.

Put together, this suggests an environment that is generally weak for economic growth. Consumer and government spending are falling as they rebuild their finances, while exports mirror the reduced fortunes of the finance and horticulture sectors. Investment may be strong in line with growing profits, but it is more likely companies will be restoring their balance sheets as well.

Improving fortunes in the UK and the Eurozone are necessary to restore Guernsey to healthy economic growth. This is certainly happening in the UK and should feed into an improved economic performance locally over the next couple of years.

Having said that, although times are difficult and uncertain, everything is relative and we should actually be celebrating a remarkable economic performance from the island while everyone else has languished. Long may we prosper.

RICHARD HEMANS,

Chartered account and company director.