A sharp synchronised global recession, and in particular a deep contraction in the US economy, Bermuda's main source of direct foreign investment and by far its largest market for tourism, will strongly dampen real GDP growth in 2009.

That is the stark prediction of the Economist Intelligence Unit (EIU), which reckons that the Island's economy will suffer an economic contraction, before a mild recovery begins in 2010.

The report by the EIU, which was published on Friday, revealed that the outlook for the global economy had deteriorated considerably in recent months, following the escalation of the worldwide financial crisis and worsening production and trade indicators.

It said that the likely prolonged adjustment in global financial markets suggested a poor outlook for Bermuda's growth prospects, given the importance of the international business and financial sectors to the economy, with the world's economy expected to contract by 1.5 percent at market rates this year, by far the worst performance since the end of the Second World War.

But the EIU believes that growth will resume in 2010, albeit the pace of the global expansion being very modest at around two percent, while it forecasts an even steeper contraction of 3.1 percent for US GDP growth in 2009, followed by a weak recovery to 0.7 percent next year.

"The depth of the US slowdown and the expectation of only a slow rebound in 2010 will act as a strong drag on Bermuda's growth prospects," it read.

"We expect Bermuda's "We expect Bermuda's growth to turn negative in 2009, down from an estimated 1.9 percent expansion in 2008. However, risks are to the downside and if tourism flows continue to decline and the international business sector suffers a more prolonged period of weak earnings then a deep economic contraction could ensue.

"The dominance and strength of the financial services sector, particularly insurance, make Bermuda's external accounts highly vulnerable to the deepening global recession. We expect Bermuda's economic mainstays will remain depressed and only begin a very mild recovery after 2010, on the assumption of a recovering US economy in the second half of 2010.

"Meanwhile, the previously robust construction sector will decline markedly, once existing pipeline projects are completed, despite public infrastructure spending plans, given that private-sector projects will suffer from delays and financing shortfalls.

"Currency parity with the US dollar will underpin import volumes as the US dollar maintains its recovery against other global currencies.

"Weaker oil prices-which we now expect to average $40 per barrel in 2009 and $50/b in 2010-will help to sustain oil import volumes, and will ease pressure on the external accounts.

"However, the beneficial impact will be offset by weaker government revenue. The easing of food and fuel prices will help to moderate inflation over 2009-10. Lower goods import values on the back of softer prices and lower transport costs will also help to offset falls in tourism revenue and a decline in income credits in 2009, allowing the overall balance of payments to remain in surplus."