The Bermuda economy contracted by 5 per cent in real terms in the third quarter of 2022 in a surprise setback after strong growth in the first half of the year.

Jason Hayward, the economy and labour minister, said he was still confident that the economy would grow between 3.4 per cent and 3.9 per cent as projected in last month’s Budget.

Mr Hayward said that the contraction in the third quarter was “a direct result” of lower government consumption, a decrease in investment, strong imports of goods and inflationary pressure.

Mr Hayward had previously predicted that the third quarter would see strong growth, saying then that higher imports in the second quarter showed economic confidence.

Yesterday’s announcement also saw significant revisions to the estimates for the first and second quarters of 2022 as first-quarter growth was revised up from 3.9 per cent to 5.2 per cent while the second quarter was revised from a contraction of 1.7 per cent to growth of 3.9 per cent.

Mr Hayward said the changes consisted of standard revisions and more significant changes because of “computational errors” for travel services and investments, which affected the calculation for exports of services.

He said of the third-quarter figures: “While the Government continues to facilitate the expansion and sustainability of Bermuda's economy, we also recognise the critical role of employers, business owners and consumers alike.

“High levels of inflation continue to place pressure on the economy's growth. Despite this, the Government will continue to create an environment that encourages economic growth while providing opportunities for Bermudians.”

The third-quarter contraction means that the economy has still not recovered the pre-pandemic level of the third quarter of 2019, when GDP was $1.527 billion in real terms. In 2022, it was $1.44 billion.

A major driver of the decline was “gross capital formation”, which saw machinery imports slump by 25 per cent and construction fall off by 8 per cent.

“I believe that if we look at the current indicators regarding government revenue, job growth, payroll tax receipts, the tourism sector and the number of tourists who actually arrived and their expenditures all being up, I think the fourth quarter will trend in a positive direction.”

Mr Hayward said growth in the first half of the year was “extremely robust”. He also noted that the economy shrank by just 0.7 per cent. and this was compounded by the inflation rate reaching its peak in that period.

Mr Hayward maintained that the economy was expanding but conceded that residents would not necessarily feel that because of the way inflation had eroded their purchasing power.

He said the efforts of the Government over the past four years had helped to improve the purchasing power of lower-paid families.

Asked about rising interest rates and high bank profits, Mr Hayward said the mortgage increases were “of concern” and were eroding purchasing power, but he said overall consumption and remuneration were “relatively strong” although he added that it was notable that retail sales were seeing a decline in the amount of goods being sold.

Asked about windfall taxes on banks if high interest rates persisted, he said the Government had the whole tax system under review and wanted to move the burden of taxation from individuals to corporations.

Mr Hayward appeared unfazed by the dramatic upsurge in overseas purchases by Bermuda residents over the past year.

He said online purchasing had steadily increased and “I don’t think you are going to see a reverse in that particular trend”.

Although local retailers had a greater economic impact than offshore retailers, this had been true in other areas of Bermuda for many years, he said, citing Bermudians vacationing overseas as an example.