Recently the Department of Statistics ("DOS") released its detailed tables for the fourth quarter of 2009. I took some time to slice through the data to discern any interesting or alarming trends. What I found may not come as a surprise to most people but it is worth noting some facts that may have a profound impact on Bermuda and its immediate economic outlook.

Construction Bear Market To Accelerate

To most people the slowdown in Bermuda's construction industry may not come as a surprise. What may be a bit shocking is the level of its recent plunge and the rather dismal forward outlook. The estimated value of work put in place for 2009 has plunged 36.6 percent from 2008. What may be more worrisome is the more leading data that indicates the value of new projects started during 2009 has also plummeted by over 38 percent. This obviously will affect future employment opportunities within the construction field.

In comparison, income within the construction field has only fallen 5.7 percent, which significantly lags the overall contraction in the future value of projects. With the dearth of new commercial projects nearing completion and the subsequent surge in available commercial rental space, it's unlikely that large new commercial projects will be initiated next year.

Furthermore, the continued weakness in the resort hotel industry (visitor stays at resort hotels sank 26 percent since 2007) make it increasingly likely that the addition of future resort inventory may be marginally profitable at best.

As a result, the near term future of the construction industry in Bermuda will likely be at the mercy of government funded projects. This presents a difficult dilemma for lawmakers who need to weigh the benefits of job creation from fiscal stimulus with the growing burden of government debt.

Shifting Composition of Bermuda's Economy

One trend that is obvious to all residents of Bermuda is the stark shift in the composition of employment. After reviewing the DOS data its worth noting the annualised 36 percent contraction in the hotels and restaurant sector over the past two years.

The largest offset to this decline has been the government sector which has posted an annualised rate of growth of about nine percent.

International business, which composes about 28 percent of the employment income of Bermuda, has grown at an eight percent annual rate over the past two years. It is clear that since 2005 the hotel industry has been the hardest hit sector. Hotel employment income has contracted 17 percent a year since then.

The often-quoted phrase that Bermuda's economy revolves around "two pillars" is at risk. One pillar is crumbling rather rapidly, the other continues to show strength and a third has sprouted - Government.

Unfortunately this third pillar is considered by many economists as temporary since it is ultimately limited by sustainable levels of government debt. As such growth in the government's influence on the economy is unsustainable. Going forward it could be argued that the success of the Bermudian economy will be dependent on its ability to grow international business and revive the tourism sector.

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Greece: A Potential Dress-Rehearsal

The issues involving Greece have become front-page news of late. In essence, Greece's lack of fiscal discipline has created a large level of debt relative to its GDP.

What is worrisome may be the often-quoted statement that the problem in Greece is "contained". This calming statement echoes another statement from our recent past: the "sub-prime crisis is contained". Unfortunately, this budding crisis has some eerily familiar parallels.

Although the level of Greek debt is small in comparison to the euro zone's GDP (approximately two percent), the level of distress echoes throughout many other Euro countries. In fact, according to John Lipsky, first deputy managing director of the International Monetary Fund, all G-7 countries, with exception of Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014. Clearly this problem is not contained. In fact Spain, another heavily indebted nation, is not an insignificant threat to the euro zone because its economy is much larger (approximately 12 percent of euro zone's GDP) and a bailout of sorts would be exceedingly difficult.

Furthermore, the debt of Portugal, Italy, Ireland, Greece and Spain (the "PIIGS") is held to a large degree in the nations of Germany and France. German and French banks would certainly take a huge blow if any of the PIIGS nations fell into crisis.

German banks hold approximately 20.1 percent of the PIIGS debt and French banks have 23.9 percent exposure. Adding up all the PIIGS economic contributions to the euro zone suggests about 35 percent of the region is in trouble.

There are a few solutions to correct these levels of exploding debt. Governments can default, eliminate the debt through inflation, or invoke measures of fiscal austerity to pay down the balance in real terms. All measures involve costs to the economy.

In a recent book, Reinhart and Rogoff indicate that a government debt-to-GDP ratios above 90 percent leads to a fall of one percent in median growth rate and average growth falls considerably.

The implications from this sovereign debt crisis in Europe are many. It would not be shocking to see a continued weakness in the euro and possible further deterioration in the European economies as they try to tackle this surge in government credit.

Nathan Kowalski is the chief financial officer at Anchor Investment Management. He holds a Chartered Financial Analyst (CFA) designation and Chartered Accountant (CA) designation. Anchor Investment Management Ltd. is licensed to conduct investment business by the Bermuda Monetary Authority. To contact Anchor, e-mail info@anchor.bm or phone 296-3515.