Back in the heyday of the Internet boom, a few economists and business analysts warned that the extraordinary growth of the stock market and the US economy was a bubble that had to burst.

Their often quiet voices were all but drowned out by the hubristic shouts of the true believers who believed with all their hearts that the "new economy" had put paid to the business cycle forever.

In the end, the Cassandras proved their point when the Internet bubble burst and both the stock market and the US economy contracted.

Editorials in this newspaper have repeatedly raised concerns about the health of the Bermuda economy. All too often, these views have been drowned out by the voices of those who believe that, somehow, Bermuda business will just keep growing and growing.

To some extent, the voices have been backed up by statistics. Bermuda's economy continues to grow steadily, if not dramatically. The commercial and residential real estate markets are booming. The international companies sector, and especially the insurance industry, seem to go from strength to strength.

The most recent retail spending figures have been generally good. Air arrivals in 2004 were up on 2003 (when Hurricane Fabian knocked out much of the fourth quarter). More importantly, length of stay was also up, which leads directly to increased spending.

So the Bermuda economy is in good shape, right? Well, as the car rental ads say, not exactly.

New incorporations of international companies have been slowing in recent years. The Island's big insurance and reinsurance companies weathered the Caribbean hurricane season remarkably well, but there are signs that premium rates are generally softening.

Construction, not tourism, has become the second pillar of the economy. The pace of residential and commercial construction in the last two to three years has been remarkable. And while it looks set to continue at least through 2006, construction is a notoriously cyclical industry and if the real estate market turns from scarcity to glut, it may well contract dramatically.

The slight improvements in tourism, and Tourism and Transport Minister Ewart Brown's plans for this year, must be viewed conservatively. While the industry had a better year in 2004 than in 2003, it is still far weaker than it was, even as recently as 2000. While any improvement should be welcomed, it has a long way to go.

The strength of retail sales is also somewhat deceiving. Much of the growth has been fuelled by the building sector. And overseas spending has been soaring for more than a year. To some extent, that speaks to the amazing discretionary spending power that Bermuda residents have and shows the strength of the economy. But it is also money that is going out of the local economy forever, and that must be worrying.

The area of greatest concern is inflation, which remains stubbornly higher than any of Bermuda's main trading partners. In the long run, that will damage the Island's competitiveness, perhaps irretrievably. It also causes strain within the local market. If some people are doing well today, an increasing number of residents, both Bermudian and non-Bermudian, are finding it increasingly difficult to make ends meet.

The easy and wrong solution to that is to raise wages and salaries, but that will simply accelerate the inflationary spiral. Instead, restraint is needed, but it is not at all certain that the Government has either the will or the desire to lead the way on that.

There's a similar inflation in the amount of bureaucracy and regulation that many companies and residents have to undergo. Regulation is important, but there comes a point when the regulated come to believe that it serves no useful purpose.

It would be nice to think that somehow, no matter what happens in Bermuda, the economy will just keep growing. That was very much the mindset in tourism until that industry reached its current sorry state. A similar complacency towards the overall economy could have disastrous consequences.