The economy grew throughout the 1990s and growth peaked in 2000.

However new predicted figures for 2004 from the States Policy and research unit suggest last year the economy shrunk in real terms.

Chamber of Commerce president Mark Trenchard says the States must keep spending under control.

The timing is not great Mark Trenchard

He said: "This isn't good news, but it's also not time to pack up shop.

"We've been expecting some kind of downturn, but we are also seeing higher inflation and we have the tax black hole looming."

Guernsey is to ditch corporation tax in an attempt to keep banking companies in the island, meaning the States faces a �45m tax gap, or "black hole".

Mr Trenchard said: "The economy is not looking in as great shape as the past and the timing is not great.

"We now have to seek ways to ride out, not a storm, but heavier winds blowing in our faces."

He said the finance industry was now "reasonably buoyant" and was looking forward to a period of "reasonable growth".

"The key issue is costs and the States has to consider how to make savings on staff, hopefully through natural wastage.

"I would also be very concerned if capital expenditure keeps on going the way it has.

"If we continue, we may dig ourselves a very big hole it is difficult to get out of."