The most severe recession to hit Bermuda since the 1930s and the closing of the military bases will have repercussions on February's Budget.

The Minister of Finance, Dr. David Saul, at an international accounting seminar organised by Deloitte & Touche last Friday contrasted optimistic economic trends with hefty costs the Government will bear after the closure of the military bases.

Although Dr. Saul made no direct reference to his stated intentions to relax restrictions on foreign exchange, foreign currency and interest rates, he gave a broad outline of developments in the economy against which the February 14 Budget has been framed.

The recession, described as "milder than originally thought,'' nevertheless, saw gross domestic product contract by six percent from 1990 to 1992, "highlighting the fact that this past recession was the most severe to have affected the island since the 1930s.'' Emergence from a recession is "a gradual process with different sectors of the economy emerging at different speeds and at different times,'' he said.

On the subject of base closures, Dr. Saul said that in 1992, the US Navy contributed about $35 million in direct revenue to Bermuda in the form of rents paid to local landlords, wages paid to Bermudians, and the purchase of goods and services locally.

Costs that will fall to the Bermuda Government include air traffic control, weather and fire services, security and airfield maintenance essential to the operation of the airport -- all estimated to have cost the US navy $10 million.

Dr. Saul is bullish that tourism will improve. The sector has shown more vigorous signs of improvement since spring 1993, ending the year with 568,141 visitors, an increase of 12.2 percent on the 1992 level -- the best performance since 1988, he said.

The slowdown in Bermuda's rate of inflation enhances the island's competitive position, he said.

In 1993, international business earned in excess of $456 million, putting it, for the first time, slightly ahead of tourism at $450 million.

Although, "cautiously optimistic about the out-turn for 1993/94,'' Dr. Saul said he is "sensitive to the fragility of the international economy.'' He suggested gross domestic product growth in fiscal 1993/4 will be in the region of 1.5 and 2.25 percent.

Dr. Saul reported "clear signs that the retail sector is emerging from four years of depressed sales.'' Retail sales in the twelve months to end-October 1993 rose by an average of 3.2 percent in value terms, while in volume terms they increased by an average of 0.5 percent compared with the averages for the same period in 1992.

However, there is unlikely to be any significant recovery in the residential construction sector for some years, said Dr. Saul, who last year described the industry's growth as "out of hand.'' "Much of the brunt of the decline in capital investment in recent years has impacted on the construction sector, and to some extent was a natural reaction to the speculative residential property boom of the late 1980s,'' said Dr.

Saul.

"The real estate market remains soft and, notwithstanding highly publicised increases in executive home rents, the rental market remains weak and the construction of new homes remains in the doldrums,'' he said.

Dr. Saul predicted that the labour market will remain soft for much of the 1990s, and he recommended a greater emphasis on training and re-training.

International agreements, such as NAFTA, those of the EEC and closer co-operation in South East Asia, as well as the Chinese takeover of Hong Kong are all opportunities that should be taken exploited, said Dr. Saul.

"Mutual funds, trust business and international arbitration are just some avenues open to Bermuda-based business,'' said Dr. Saul.

MICHAEL KEVANY: `Very disciplined approach'.