THE Policy Council’s Sustainable Guernsey 2006 publication looks at social, environmental and economic trends in the island that enable it to monitor changes and to formulate strategy. The ‘Economy’ is one of four major categories that the document evaluates, along with ‘Environment’, ‘Social’ and ‘Community Well-being’.

Having reviewed the economic growth section of the economy last week, I will look at inflation and employment in this article.

There are two main measures of local inflation: the headline rate and RPIX. The latter excludes the effect of mortgage interest payments, while the former includes them. The document compares Guernsey’s rate of inflation, using both measures, with the UK and Jersey since 1998.

Guernsey’s headline rate of inflation stood at 3.1% in March, the lowest it has been since March 2002. It has also been falling since September 2004, when it reached 5.2%. Although it has been declining in absolute terms, it is still higher relative to the UK and Jersey.

The same applies to Guernsey’s RPIX, which stood at 2.8% in March, the lowest it has been since March 1999.

The difference between Guernsey’s rate of inflation and that of the UK has been shrinking over the last four or five years, which is positive.

However, the performance of Jersey’s rate of inflation has been very impressive.

Until March 2004, Jersey’s headline rate of inflation was always higher than Guernsey’s, but since then it has managed to keep it lower. Its rate was also the same as that of the UK in March this year.

Jersey is therefore managing to exercise more control over its rate of inflation than Guernsey, although our performance is improving. The world has enjoyed lower inflation in recent years because stable, credible central banks have combined with increasing globalisation and growing competition to restrain it, in spite of soaring commodity and energy prices.

The Channel Islands have also experienced these phenomena, but our shortage of factors of production, inferior economies of scale and less vigorous competition in both factor and goods markets put upward pressure on local inflation. Guernsey clearly has something to learn from Jersey, however.

There was a fall in employment in Guernsey in 2005 as the workforce contracted by 0.3%, although it has risen by 6% over the last decade. This was due mainly to a 1% fall in the number of males employed, which a 1% increase in the number of females could not offset.

It is encouraging to see greater female labour participation, but the workforce will need to grow in the future to fill the fiscal deficit. The number of unemployed people rose in 2005 and has been on an upward trend since 2003, but the figure is still insignificant as a proportion of the workforce, at 0.36%, and should not cause any concern yet.

As expected, the finance sector employs the highest proportion of the workforce, at 23% or 7,113 employees.

The number of finance sector employees has declined in the last couple of years, however, from 7,413 in 2003 or 24% of the workforce.

This is worrying because the States expects the finance sector to provide most of the economic growth and taxation from employment to plug the public finance gap.

The increase in the outsourcing and offshoring of back-office functions may explain this trend, but it may also be a fall in demand, greater productivity or more attractive job opportunities elsewhere.

We must hope that if it is the restructuring of low-value administrative functions, the finance sector will eventually replace these with more high-value functions that pay higher salaries and create greater wealth.

Indeed, while finance sector employment is shrinking, the number of people working in retail and business services is increasing, so there are still plenty of job opportunities in other sectors that are growing and will contribute future tax revenues.

Public sector employment has also seen strong growth, however, with rises registered across health, education and public administration.

The size of the public sector in relation to the private sector will have to fall or at least stabilise as zero-10 approaches so that the private sector can generate the economic activity and taxation necessary to fund the public sector.

Next week, I will look at the distribution of income among the various sectors that make up Guernsey’s economy, as well as some of the other sections relating to the economy contained in the report.