'Whereas in recent years it has been the offshore life industry that has been most affected it would now appear that the focus is on the banking sector and in particular the extent of the impact of the introduction of the withholding tax on bank interest to non-residents scheduled for July 1 2005,' notes the report.

Ministers were told that the Island's banking sector had experienced mixed fortunes in the wake of the staff cutback by Coutts. This was offset to some extent by further recruitment by Lloyds TSB.

'Banking comments generally suggest a continual steady business flow but with some indications of slowing.'

Regarding funds under management, the report said there had been a marked increase during the quarter ended June 30 with more than a £1 billion increase.

'This is somewhat exceptional as previously the average quarterly trend has been half that figure.

If the average quarterly increase can be sustained this will be a significant result given the lethargy in the funds industry up to June 2003.'

The report noted that the insurance industry had benefited the insurance industry. However, during the third quarter CMI closed its Hong Kong office. On a positive note Friends Provident International has opened a Dubai office.

'The restructuring of Scottish Life resulted in a number of job losses in the Island but there was better news with increased interest received regarding International Pension Schemes with further schemes due to be registered shortly.'

The report noted that the national income figure for 2002/03, released in September, had showed growth to have been higher than expected. GDP rose 5.9 per cent in real terms compared to the 3.5 per cent contained within government's central planning assumptions.

'There is a case for revising the central planning assumptions on future growth rates marginally upwards on the back of this out-turn.'
The labour market is regarded as 'still generally healthy'.

Inflation, however, is seen as a source of concern.

'The onset of increases in base, and hence mortgage, interest rates was always going to mean the Island's inflation rate edging upwards from its 2003 norm of around 3 per cent. But the real factor in pushing the rate up to its current level of 6 per cent has been the oil price and its impact on fuel and energy prices generally.

'The fuel and light category within the RPI increased by 23.8 per cent in the 12 months to mid-September. On a bold assumption that energy prices are at or near their peak, we can however expect the rate of inflation to begin to fall in the New Year.'
Consistent with what is being experienced in the UK, the Island's housing market has come off the boil.

'The general sentiment concerning future movements in property prices added to the increased supply of residential property will serve to push the rate of increase (in house prices] further downwards, despite a renewed net inflow of population as reflected in child benefit figures.'

There was a net inflow of 96 parents and children in the year to date (September 30] compared to an outflow of 122 over the same period last year.

Treasury said manufacturing, e-business and fund management had shown a strong performance during the third quarter. The passenger survey to the end of September showed the number of non-business visitors to the Island staying in paid accommodation rose from 100,000 to 107,000.

The global economic picture is described as mixed. China, India and other developing economies continue to power ahead and even Japan looks to have finally stepped on to a growth path.

But the EU economy is being hindered by the sluggishness of Germany while there are signs that the US economy is stuttering under the weight of internal and external indebtedness.

The IMF reported an upgrading of its global economic forecasts for 2004 and 2005 such that it saw 2004 witnessing a 30-year high in growth. 'However this set of forecasts was based on a peak oil price of $35 per barrel. One suspects that the next release will see downward revisions.'

The report said the UK economic outlook hinges upon 'getting it right' in respect of interest rates.
'The worst of the global slowdown was avoided in the UK through astute and timely application of monetary policy by the Monetary Policy Committee.

Effectively, by making credit cheap, households were encouraged to continue spending and so sustain employment and output level.

'So effective was this policy that household indebtedness has risen to record levels, total savings as a proportion of total incomes have fallen to just 1 per cent, and average house prices increased by 25 per cent in two years.

'The problem now faced is how to curtail some of this spending without overdoing it to the extent that the main factors underpinning it, namely the wealth effect from increased property values, is not too damaged.

'This, plus some weak data on the strength of British manufacturing and parts of the services sector, explains the recent hiatus in the series of interest rate increases that began last November.

'Oil prices aside, inflationary pressures are insufficient to warrant a base rate increase in the near future.'