Your grandaughter is a lucky girl.
A pillowcase (hot dog method) would be easy, and she could pick out the perfect fabric!
A mini quilt for her favorite doll.
A little tote bag for her things.
A little purse for her.
An apron, so she could help you in the kitchen.
A special birthday placemat.
Some of those coasters made with the four pieces of overlapping fabric (sorry, can't recall their name).
Oh, there are so many things...the hard part will be choosing which one.
p.s Little felt ornaments in the shape of mittens, stockings, snowmen, stars, bells...etc. She would learn careful cutting, and could stitch around the edges, and then decorate them with glued on sequins, beads, cording, etc.