World stock markets plunged again yesterday after the US Congress rejected legislation to bail out the financial sector. That rejection, just hours after House of Representatives leaders though they had an agreement, shows that predicting the economic future from one day to the next is impossible – much less what the world or Bermuda economy might look like in a few months.

The truth is that no one – not the Federal Reserve, not the US Treasury, certainly not the world's investment markets – knows what may happen next. And that is as true for Bermuda as it is for the US or the global economy.

Still, it seems pretty likely that the US is now headed for recession, or at least for a painful recovery in which the massive amount of debt the US government has had to take on will hamper economic growth.

At the same time, Ireland became the first European nation last week to officially enter recession after recording a second quarter in which its gross national product fell. The United Kingdom looks like it is close behind. Yesterday, a number of European financial services companies had to be rescued.

For Bermuda, the picture is less clear. It is obvious that tourism is suffering, and no help can be expected from that quarter. International business may prove to be more resilient.

There are signs that reinsurance rates are beginning to steady or rise slightly after a long soft market, but that will be offset by claims from Hurricanes Gustav and Ike and the dreadful investment returns that most reinsurers will have experienced in the last six months.

In any event, the trend in international business in the last couple of years has been towards creating jobs anywhere other than Bermuda, and if anything, that trend will accelerate.

The real concern is whether other companies will now begin to vigorously cut costs as local heavyweight XL Capital – the first major local victim of the sub-prime crisis — appears to be doing.

No one seems to know what will happen to AIG's significant presence in Bermuda. The other legs of the international business sector – banks, trusts and the like – will be struggling as a result of the global slowdown.

Sen. Barack Obama's return to the question of taxes and offshore financial centres in a hard hitting ad last week is also worrying. Those who claim that this is merely campaign rhetoric should recall that cutting offshore tax loopholes is the only revenue-raising measure that he has discussed on the campaign trail. If he becomes President, and assuming that the US economy is in still difficulty in January, he will need to get money from somewhere. And offshore tax centres are easy political targets.

Domestically, the area to be most concerned about is the construction sector, which has been driving the local economy for the last few years. There is currently a great deal of building going on in Hamilton, but as those projects wrap up, it would take a brave developer to build without a tenant in place.

And unless the various hotel projects go ahead (and the investment argument for them is even weaker now than it was six months ago) then it seems likely that construction will contract within the next year.

In that context, it was worrying to hear Finance Minister Paula Cox warning that the economic climate could mean a reduction in Government projects. This could be the time when public capital projects are most needed to inject life into the economy.

It is not entirely clear why this is now being ruled out. By most countries' standards, Bermuda's creditworthiness is good, even if the level of debt has risen fast in recent years by local standards. But it seems clear that Government will not reach its revenue targets this year with employment and incomes flat, tourism down and the retail sector flailing. This will inevitably restrict Government's ability to act.

At the same time, high inflation will bring pressures to bear on the Government to reduce some Customs duties, which may reduce revenue further, even as it injects money into the local economy. What the last two weeks have shown is that there are no easy choices in this economy.