The news on Friday that Bermuda's economy contracted much more sharply than forecast in 2009 should not come as much of a surprise; the combination of a huge drop in tourism, poor financial results from many international companies and local banking woes all pointed in that direction.
It does beg the question of how the Finance Ministry could have gotten it so wrong. As recently as July, Premier Paula Cox, Finance Minister then and now, was predicting that 2009's GDP would contract by 2.5 percent. That prediction was repeated by ratings agency Standard & Poors in September when it improved Bermuda's credit worthiness outlook.
Instead, the economy in fact shrank by 5.8 percent or around $350 million. In real terms, after taking inflation out, the decline was even more severe; some eight percent.
Ms Cox has not yet changed her prediction that the economy will grow by around one percent this year, but anecdotal evidence suggests that Bermuda is likely to see a third year of recession after 2009's 5.8 percent decline and 2008's 0.8 percent decline.
There have been some positive signs in 2010. International business, despite the departure of some companies, is more financially stable than it was in 2009. So is the banking sector. Tourism has shown some improvement. However, there have been negative signs as well. Construction, which held up somewhat in 2009, has now slowed down significantly. The domestic business sector has also cut back drastically, especially in retail. Real estate and the rental market continues to struggle.
There is also the news that there are a thousand fewer people on work permits on the Island than there were a year ago. That inevitably signals a slowdown. So if Bermuda achieves one percent growth this year, that will be about the best that can be achieved; the greater likelihood is a third year of recession.
What does that mean to the average person? Quite simply, fewer opportunities, fewer jobs and more financial insecurity. That in turn reduces confidence, and cause a continuing spiral as consumers slow down spending, businesses take fewer risks and the pressure on public finances increases.
Indeed, although Bermuda's debt to GDP ratio a common measure of the strength of public finances remains strong by international standards, it has increased sharply as a result of the new figures. Before, it was said to be 12.7 percent. On Friday, Ms Cox said it was 16.6 percent.
Ms Cox also noted how vulnerable Bermuda is to external shocks, especially in the financial markets, and the GDP figures show how dependent the Island is on international business. This is no secret, but the numbers make it graphically clear.
In 1999, international companies were directly responsible for 13.9 percent of GDP. In 2009, this number had almost doubled to 26.1 percent. Of course, international business is responsible for much more than either of those figures. The money it earns from overseas circulates through the rest of the economy in the form of business services, rents, taxes, use of hotels and restaurants and so on.
But it is worth noting that almost every other sector of the economy except financial intermediation and business activities (both closely linked to international business) have seen their shares of the economy shrink in the last decade. The only other sector to grow? Government.
For Bermuda's economy to grow and to become less vulnerable to external shocks, two things must happen. First, Bermuda must ensure that international business is given every reason to remain and grow in Bermuda as a form of ensuring the Island's short term financial future. And second, Bermuda must look at different options for diversifying the economy to reduce its vulnerability to downturns elsewhere.