Finance Minister Paula Cox has cut her 2008 growth forecast for the Bermuda economy against a backdrop of rising inflation, falling visitor spending and a global economic slowdown.

The Finance Ministry now predicts real GDP (Gross Domestic Product) growth of two to 2.5 percent this year, compared to the forecast of 2.5 to three percent, made after February's Budget announcement.

Bermuda's balance of payments current account surplus had halved in the first quarter of this year, Ms Cox said, after spending on imported goods and services soared by 26 percent, due to higher prices and increased demand.

Figures showed visitors numbers down and visitor spending plunging by some $14.6 million in the first three months of the year. In contrast, Island residents actually took more leisure trips overseas.

And while the international business sector had continued to grow, the continuing ripple effects of the sub-prime mortgage crisis cast a shadow over the prospects for further growth, the Minister added.

"With the softer outlook for visitor arrivals, some potential risks to other areas of growth, and the higher rate of inflation, the Ministry of Finance has reduced its projection of Bermuda's real GDP growth in 2008 from the range of 2.5 to 3.0 per cent — as presented during the Budget debate — to the range of 2.0 to 2.5 per cent," Ms Cox told MPs in the House of Assembly on Friday.

With most of Bermuda's business sourced from the US, Ms Cox said she had to take into the struggles of the American economy, which appeared to be experiencing "stagnation" in almost all sectors.

She also referred to last week's comments by US Federal Reserve chairman Ben Bernanke that strains in financial markets, falling house prices, a weaker labour market and higher oil prices were all putting pressure on the US economic outlook.

The first half of the year had seen 560 new international companies and partnerships registered in Bermuda, Ms Cox said.

"However, there is an area of risk that the Ministry of Finance will keep under careful surveillance: the ongoing impact of the sub-prime debacle in major credit markets and its deepening impact on global insurance markets and banking business.

"The Bermuda Monetary Authority has been proactive in monitoring the soundness and security of investment portfolios in Bermuda's financial services sector. To date there has been limited impact on most investment portfolios. However, in the case of financial guarantee companies, the pressures have been greater. Where necessary, the BMA is assisting affected companies in working through restructuring options."

Inflation had risen in Bermuda and elsewhere, driven by rising energy prices, Ms Cox said. "As the world has borne witness, the sustained increase in the price of oil is causing the inflation rate to move to higher levels in all countries that use fossil fuels as a source of energy," Ms Cox told MPs. "The Consumer Price Index has increased from a rate of 3.1 percent in 2005 and 2006, to 3.8 percent in 2007 and in 2008, the 12-month underlying trend rate is 4.2 percent."

While Bermuda's current account receipts in the balance of payments recorded a year-on-year increase of 4.5 percent in the first quarter of 2008 with an inflow of $962 million for the quarter, the increase was more than offset by the 26-percent rise in imported goods and services to $848 million.

"This, no doubt, was a reflection of increased demand in the economy as well as the effect of increases in prices," Ms Cox said. "The effect of the heavier increase in imports in the first quarter was to reduce the current account surplus by half compared to the first quarter in 2007. The current account surplus in the first quarter of 2008 was provisionally estimated at $114 million."

Consumer spending on retail goods for the first quarter of 2008 increased 3.3 percent year over year. Gross turnover in the retail sector was estimated at $255 million for the quarter. All retail sectors, with the exception of the building materials and motor vehicle sectors registered gains in sales revenue.

In the travel sector, signals were mixed, Ms Cox told MPs. "Visitor arrivals fell by 8.1 percent in the first quarter," she said. "In contrast, there was an increase in the number vacation trips taken by residents in the first quarter of 2008. A total of 29,083 vacation trips abroad were taken compared to 26,676 in the first quarter of 2007, reflecting an increase of nine percent. Visitor expenditure in the first quarter of 2008 declined to $52.3 million compared to $66.9 million in first quarter of 2007."

Ms Cox added that outlook for the construction sector, a major driver of growth in recent years, remained strong, supported by several ongoing projects in Hamilton, as well as public infrastructure jobs.