Economic forecasting group the EY ITEM Club has outlined how the Channel Islands will be affected by the shifting makeup of the UK economy in the coming years.
According to the group’s winter forecast, the recent slump in sterling should prompt a significant readjustment of the UK economy, away from consumer spending towards exports. But while economic growth will be better balanced, it is also likely to be slower.
The EY ITEM Club says the impact of sterling in increasing import costs will see inflation rise to 3.1 per cent by the final quarter of 2017, before easing back to 2 per cent by the end of 2018.
This is expected to have a knock-on impact on consumer spending, as growth in disposable incomes is eroded.
However, the weak pound and a softer domestic market are likely to encourage higher levels of UK exports, as businesses seek income opportunities overseas, resulting in exports increasing by 3.3 per cent this year and 5.2 per cent in 2018.
Risks and uncertainties
The forecast notes that the UK and the Channel Islands are still in a risky period because of the unknowns surrounding Brexit.
Presenting the forecast at seminars in Jersey and Guernsey in January, EY ITEM Club Senior Economic Adviser Martin Beck (pictured) outlined the options for leaving the EU. And he said the Channel Islands could provide a model for the UK.
“The islands’ third-country status works well for them and their relationships with the EU probably won’t change all that much, no matter which option the UK government negotiates,” he said.
“What will be interesting is how the islands’ relationship with the UK changes post-Brexit. There will certainly be new trading opportunities opened up by Brexit, particularly as the islands provide such stability.”
Beck said close links between the economy of the UK and those of the Channel Islands mean that the latter will feel the effects of a slower UK economy. The UK is the Channel Islands’ most prominent trading partner, so the value and volume of trade into the UK from the islands will be affected.
Small economy impact
He added that it was difficult to gauge the success of economies such as those in the Channel Islands. “Small economies are more susceptible to erratic market behaviour and feel a greater impact from large one-off developments than large. This makes it hard to judge underlying economic performance.
“Additionally, the economies of the islands are underpinned by financial services, which is very hard to measure given their ‘invisible’ nature.”
According to the report, the rebalancing of economic activity in the UK will be accompanied by three years of relatively slow growth. The EY ITEM Club expects GDP growth to reach 1.3 per cent in 2017 (up from the 0.8 per cent it predicted in October’s forecast, but down from a 2 per cent in 2016) and just 1 per cent in 2018.
• A full copy of the EY ITEM Club winter forecast is available here