Some of the world's top independent economic analysts believe Bermuda's economy is at growing risk of contracting, largely because of its heavy reliance on the slumping US financial sector.

A report issued this week by The Economist Intelligence Unit (EIU) says its expects growth of the Island's economy to slow further from the 2008 figure of an estimated 2.2 percent and that recovery in sectors Bermuda depends on could see only a mild recovery in 2010.

The report does not go as far as to say that Bermuda faces a recession — defined as two consecutive quarters of negative growth — but it makes clear the risk of that scenario will increase as the US recession deepens.

"The dominance and strength of the financial services sector, particularly insurance, makes Bermuda's external accounts highly vulnerable to the deepening US recession, and risks of a contraction in Bermuda's economy have grown," the EIU report states. "We expect Bermuda's economic mainstays will remain depressed and only begin a very mild recovery after 2010, on the strength of a recovering US economy."

The construction industry, which has flourished in recent times on the back of numerous new office and residential developments, should brace itself for a particularly difficult time, according to the EIU. "The previously robust construction sector will decline markedly, once existing pipeline projects are completed, given that the government no longer expects to meet its original public infrastructure spending plans, and private-sector projects will suffer from delays and financing shortfalls," the reports states.

Yesterday, the International Monetary Fund predicted that global economic growth in 2009 would be around 0.5 percent. The EIU believes the global economy will contract by 0.9 percent during this year, which it describes as "by far the worst performance since the end of the Second World War".

"Our forecast for US GDP growth in 2009 is for a contraction of two percent, recovering only slowly to growth of 0.6 percent in 2010," the report states. "The depth of the US slowdown and the expectation of a slow rebound in 2010 will act as a drag on Bermuda's growth prospects, and we expect growth to slow further in 2009 from an estimated 2.2 percent expansion in 2008."

The downturn around the world, and particularly in the Island's biggest trading partner, the US, will hinder the local economy, according to the EIU.

"The outlook for the global economy has deteriorated considerably in recent months following the escalation of the global financial crisis," the report states.

"Moreover, a likely prolonged adjustment in global financial markets suggests a poor outlook for Bermuda's growth prospects, given the importance of the international business and financial sectors to the economy.

"A forecast deep and prolonged global slowdown arising from a synchronised recession in the US, Europe and Japan, will harm prospects for Bermuda's international business and tourism sectors."

On the plus side, the EIU believes that the falling cost of many key imports will help the Island's balance of payments to remain in the black and to curb inflation.

"Falling global oil demand leading to a recent slide in international oil prices will help to sustain oil import volumes," the report states. "A continued weakening 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 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."

The EIU, which was founded in 1946, is a leading global research and advisory firm with more than 40 offices worldwide.