In an update issued overnight on Friday, the Fiscal Policy Panel has advised that the short-term shock on the economy has the potential to lead to long-term structural weaknesses.
And it has warned of significant job losses, a rising threat of Islanders and firms going bankrupt, a fall in average earnings and a severe reduction in profitability, particularly in the non-finance sectors.
The FPP had been forecasting a 1% growth in the economy this year.
To reduce the potential structural damage, the panel has recommended that the government supports the economy using reserves, including both the Strategic Reserve and the Stabilisation Fund.
In its letter to Jersey’s Treasury Minister, the FPP said the most likely outcome was:
1. A fall in employment from the recent peak, as firms seek to cut costs to mitigate the fall in demand or are forced to close.
2. Lower inflation in 2020 due to lower oil prices and mortgage payments. However other inflation pressures could work in either direction, as supply chain disruption or other shortages could cause pockets of high prices but there will be downward pressure on other prices due to reduced demand.
3. A fall in average earnings, due to a combination of lower demand for labour and lower inflation.
4. Lower interest rates, in line with market expectations and with the Bank of England’s decision to cut rates to a record low of 0.1%.
5. A fall in profits in the financial services industry, partly driven by lower interest rates, and a much sharper fall in non-finance sectors due to reduced demand and supply chain disruption.
6. A sharp slowdown in the housing market with a very limited number of sales during the peak of the outbreak and for some time after.
7. Some firms and individuals experiencing extreme economic hardship.
It adds: ‘In our central forecast, this could see the Jersey economy (as measured by gross value added – GVA) contract by over 6% in 2020.
‘However, this forecast for annual growth comprises a very sharp contraction within the year with a short period of very steep decline, particularly in the second and third quarters of the year, but with the first and last quarter seeing less impact. The Panel’s central forecast is for a relatively quick recovery, regaining much of the loss of output in 2021.’
In its letter, the FPP said it supports the government’s package of measures to help the economy, which include:
• Liquidity and cash flow measures for businesses
• Support to maintain employment in affected sectors
• Support for individuals and households in hardship
• A temporary package to stimulate the economy
• A payroll co-funding scheme worth £100 million
Responding to the updated forecast, Treasury Minister Susie Pinel said: ‘The Government of Jersey is committed to supporting businesses and households through this challenging time.
‘We have announced a number of measures to date, including support to businesses such as deferring payments of GST and Social Security contributions as well as additional support to the health sector and a three-month payroll co-funding scheme worth £100 million, which can support up to 27,000 employees, that’s half the Island workforce and help keep Islanders in their jobs during this difficult time.
‘While the ultimate impact of COVID-19 is difficult to predict at this stage, the panel’s findings demonstrate the potential for a significant recessionary impact this year, seeing a short, very sharp fall in economic output in the next six months.
‘Thanks to our prudent approach to finances, Jersey has considerable reserves that have been built up over many years to respond to conditions such as this. The government will not hesitate to leverage off our financial strength to bridge the economy over the coming weeks. My ministerial colleagues and I will continue to develop a package that will support the economy to take advantage of the recovery when the outbreak is over.’
