The Sustainable Guernsey Report 2006 looks at numerous key economic indicators to evaluate their progress over time and to enable the States to make informed strategic decisions. One of these is entitled distribution, which analyses the relative contribution of each industrial sector to the economy in terms of its factor income during the last decade and highlights their growth or decline.

Factor incomes represent the profits and remuneration of local businesses, which are the main components of GDP.

The total of them has risen by 30% since 1996, although there was a fall in 2003 when the whole economy declined.

Last year shows no growth in such incomes over 2004, which is inconsistent with the estimated overall GDP figures that suggest growth of 2%.

This is concerning because it seems that the economy may not have grown at all last year.

There are 10 main sectors that make up the economy and their respective factor incomes are analysed over the last 10 years.

The figures therefore represent their absolute and relative performances over time.

They also show the growing domination of the service sector and the continuing decline of manufacturing and the primary industries.

Finance and legal are the largest contributors to the economy, generating £479m.-worth of wages and profits in 2005, or more than 36% of the total.

They were also number one in 1996 and have grown by 27% over the last decade.

They have increased every year since 1996, except in 2003 when there was a sharp decline, but there have been striking differences in the growth rates during the decade.

Between 1996 and 2000, finance and legal experienced an average growth 7.3%pa, while the pace of expansion averaged 1.8%pa between 2001 and 2005, excluding the drop in 2003.

Growth has resumed since then, but the level of factor incomes is still below those of 2000 to 2002 and the rate is very lacklustre.

It measured only 1.3% in 2005, which is below the long-term growth rate of the economy and the level necessary to meet the fiscal deficit.

It is encouraging, however, that this sector has continued to grow in spite of lower employment, which suggests that their labour has become more efficient and productive.

The public sector is the second largest component of total factor income – at £198m. or 15% in 2005- and has been so for the last decade, during which it grew by 28% and peaked at £204m. in 2004.

This growth rate has been faster than the finance sector, but slower than the overall economy.

Public sector factor income fell in 2005 in spite of higher employment, which suggests that either it is becoming less productive or wages are falling relative to inflation.

ICT and other business services is the sector to have enjoyed the strongest growth over the last decade, almost doubling its level of factor income from £95m. to £183m.

It also moved up the table to third place, overtaking wholesale, retail and utilities, which grew by 29% to £168m.

The sector grew very strongly from 1998 to 2002 and surpassed wholesale etc. in 2003.

Even in 2005, ICT grew by a robust 4%, while wholesale etc. declined by 2% and it is the former which is clearly providing much of the economy’s momentum.

Construction remains the fifth largest constituent at £117m. in 2005 and it has grown by 80% over the last decade in spite of a modest decline last year.

Hostelry and recreation is still the sixth largest contributor, although it still had the same factor income in 2005 as it did in 1996 and has been in decline since 2003.

Manufacturing stands in seventh position with a factor income of £41m., which is 16% lower than 1996 although it has stabilised since 2003 and has actually shown some modest growth since then.

Primary industries, including horticulture and agriculture, have declined to ninth place since 1996 to be replaced by transport, which has risen only because its decline has been less severe.

There is a continuing shift to services away from manufacturing and other primary industries in line with the rest of the developed world.

This is good for Guernsey because services are growing faster, are more profitable and pay superior wages.

Moreover, their absolute gross value added is higher than other sectors, as well as is their GVA per employee, which is important because labour is one of the island’s scarcest resources.

The report contains a table that shows the absolute GVA and GVA per employee by economic sector.

Labour is a scarce resource and will generate more and more of the island’s future tax revenue.

Guernsey must therefore encourage those sectors that create the highest GVA per employee because they are the most lucrative and the most efficient in their utilisation of labour, with due regard for economic diversification and the interdependence of some economic sectors.

The figures show that finance and legal, miscellaneous business, wholesale and information technology produce the greatest GVA per employee in relation to their total GVA, while the public sector, construction and hostelry produce the lowest on that basis.

Clearly an independent, diversified and developed economy needs an excellent public sector, first-class hotels and restaurants and a strong construction industry, but the figures emphasise that finance and legal and ICT and other business services are the island’s most efficient, productive, important and growing sectors.

Economically, we must therefore guarantee their protection and encouragement.

* Comments to rich@hemans.net Richard Hemans is a chartered accountant who works on a freelance basis.