With the Throne Speech taking place tomorrow and the Budget Statement following just two weeks later, Finance Minister Paula Cox will have been following the recent turmoil on the stock markets with some care.

Determining whether the US, Bermuda's major trading partner, will go into recession this year and what effect that might have on Bermuda is the key question. If the US economy does slow down or shrink, it will undoubtedly affect the Island, and especially tourism. The last US recession after the 2001 terrorist attacks and the dotcom bubble burst hurt Bermuda's tourism to some degree, while the more serious recession of the early 1990s dealt it a hammer blow.

There are some factors now that are different, most notably the weak US dollar, which keeps US travellers closer to home and in dollar denominated jurisdictions at the same time that it makes Bermuda more attractive to Europeans and Canadians. The increase in airlines serving the Island also helps, although continuing rises in fuel prices will hamper their ability to offer cheap airfares.

Where a credit crunch may have some effect is in the development of new hotel properties. Bermuda hotel resorts do not offer tremendous returns on investment to begin with given the Island's high fixed costs, but they may be even less attractive for redevelopment if financing is harder to get.

It is harder to read what may happen on the international business front. The sub-prime crisis in the US has now affected Bermuda-based bond reinsurers and has also knocked some of the Island's leading general reinsurers, notably XL Capital. But it seems likely that the general reinsurers have enough strength on their balance sheets to withstand the blow. Still, it couldn't come at a worse time as the insurance industry cycles back into a soft market, meaning that profits will generally weaken anyway. With investment markets also falling, this is likely to mean weaker earnings for insurers and may signal a new wave of consolidation.

Not all of this is bad. There have been concerns for some time that the local economy is overheated and that inflation is rising, and in that context, a slowdown in growth would be desirable. But the challenge is to make sure that a slowdown does not turn into a full blown recession. That's a much harder thing to manage. Bermuda's banks opted to follow the latest drop in interest rates by the US Federal Reserve, and that will give the local economy a boost, but given the recent spike in local inflation, it has to be handled with care. While borrowers and mortgage holders will welcome the drop in costs, too much liquidity in an inflationary environment can be dangerous.

If there is a precipitous decline in the local economy, and especially in construction, then it may be timely for Government to accelerate some of its capital projects, possibly at a lower cost than those currently on offer. It could also consider reducing either payroll tax or Customs duties in order to inject more liquidity into the market and to make Bermuda more competitive. Unfortunately, Government has been spending the higher than expected tax revenues it has seen in recent years as fast as it has received them, meaning there isn't much of a rainy-day fund to handle such a cut.

Either way, Government needs to exercise prudence in its spending. Government, especially through the Future Care seniors health insurance scheme promised in the December election, is committed to spending an unknown amount of money. Health Minister Nelson Bascome admitted recently they don't even know how many people the scheme will serve. The risk is that the programme, when it is finalised, will either be wildly expensive or, if prudence rules, will fail to fulfil the promises made by the Progressive Labour Party.

This may be moot; the concept was so sketchy in the General Election campaign, and is still so early in development that it is unlikely to figure in 2008-2009 current account spending. But if the US economy remains weak for any length of time, it may have a negative impact.