While Bermuda is still operating at a surplus in its business with the world, worrying statistics have emerged that global economic volatility is shaking the Island as well.

According to the balance of payments report for the second quarter of 2008 released yesterday by Government, Bermuda's income account surplus fell $29 million in the second quarter; there was a $15 million drop in the services transaction surplus; the goods trade deficit widened by $42 million; and, Bermuda's asset accounts paid out $496 million as opposed to the $425 million they took in during the same time period in 2007.

Bermuda recorded a current account surplus of $315 million, however, a considerable improvement over $114 million recorded in the first quarter of 2008.

But inflows to its financial account from investment have fallen to $1,025 million less than half of the balance at this time last year.

Government said that high oil prices during this quarter when the price per barrel spiked at $125 led directly to an increase in the money Bermuda spent outside the Island. Residents imported $302 million in goods a 16 percent increase over 2007.

"The import bill was impacted the most as and extra $46 million was spent to purchase foreign goods, as the value of fuel imports doubled during the period. The effects of rising oil prices translated to higher transportation costs and fuel surcharges on energy bills," the report said.

These spiralling costs hit smaller businesses hard, the report noted: "Typically, a business is not able to change its cost structure fast enough to keep pace with the changes in prices.

"In Bermuda, smaller firms are particularly vulnerable as they are unable to balance the price spikes against long term revenue and sources of capital.

"To offset rising production costs, small businesses generally have the option of curtailing other investments and/or increasing the price of their goods. However, these decisions sometimes make small businesses less competitive and impede their long-term profitability."

Overseas demand for Bermuda's services is also slackening, the report noted, with overall net receipts from service transactions falling eight percent.

Export of services transactions totalled $454 million during the second quarter of 2008, one percent below the $459 million earned in the second quarter of 2007.

"This suggests that foreign demand for local business services such as legal, accounting, computer and information services contracted as the price of oil peaked on the world market," the report said.

"Consequently, those companies that successfully passed on their cost of energy hikes to customers were unable to compete globally, and experienced a shrinking surplus on foreign exchange transactions during this period.

"While income outflows monies paid from Bermuda to non-residents have fallen by $15 million to the lowest level since 2005, this was overshadowed by a $44 million decline in income receipts.

"The $25 million increase in employee compensation this quarter was wiped out by a $69 million drop in investment income receipts," the report noted.

"Low investment income this quarter was consistent with smaller overseas holdings of money market and debt instruments compared to this time last year.

"Bermuda's current transfers account fell into a deficit of $3 million in the second quarter. "This performance reflected both a decline in receipts and growth in transfers to non-residents," the report said.

However, the reserve assets account recorded a new inflow of $11 million for the quarter, reversing the outflow of $26 million seen during second quarter of 2007.