There was more bad economic news for Bermuda yesterday when Government announced that the balance of payments current account surplus shrank from $404 million to $315 million in the second quarter of the year.

On the capital account side, the picture was even worse, falling from a surplus of $425 million in the same period a year ago to a deficit of $496 million as overseas investments turned negative. To be sure, care needs to be taken with capital account figures, which gyrate quite dramatically. Still, Bermuda had a balance of payments deficit of $181 million for the quarter, compared to a surplus of $829 million in the same period a year ago, a drastic worsening of the situation.

There are two primary causes for the decline in the current account surplus. As Government reported, one was the dramatic hike in oil prices in the first half of the year, which meant that Bermuda had to spend vastly more both to buy imports and to get them to the Island.

This is likely to continue in the third quarter, as oil prices continued to soar but should begin to drop off this quarter as the oil price has since plummeted. However, Government also reported a lessening of demand for Bermuda business services. That trend is likely to continue as the global economy has weakened. On the capital account side, the deterioration in world investment markets seems to be almost entirely to blame. Since these figures only go to the end of June, this deterioration is likely to worsen for the third quarter.

In lay terms, Bermuda is now spending much more than it earns. That is not entirely unusual with a recession looming, but it cannot be sustained forever.

Yesterday, the Bermuda Monetary Authority released its regulatory update for the period through the second quarter, and here too the news is poor. Although money supply increased in the quarter, it is unclear how long this will continue with the tourism sector down and international companies struggling.

Although Bermuda's banks remain stable and well capitalised, the figures here have also shown a deterioration.

The BMA continues to maintain that the lending of foreign currencies into the local market is acceptable, but the deficit of Bermuda dollar deposits to the total amount loaned reached a record $734 million in the second quarter. This took place even as total foreign currency assets and liabilities declined in the quarter, and the banks recorded a foreign currency deficit of $71 million – the third consecutive quarter in which this has taken place.

This may seem a little high flown; the bottom line is that the banking sector, while still strong, is not as buoyant as it was 12 months ago. In the end, this may have an impact on the local economy if lending conditions tighten. On international business, the picture remains gloomy as well. The number of investment funds registered in Bermuda and their net asset value declined in the second quarter for the first time in recent years.

Just nine new insurance companies were formed in the same period compared to ten in the first quarter and 22 in the same period in 2007. Overall, 366 companies were incorporated in the quarter, a marginal increase on the first quarter, but down substantially from the same period a year earlier.

None of this means that the economy is in poor shape. But the signs of a weakening economy are clear – and these statistics only go up to the end of June, before the worst shocks to the world economy, which started to hit in earnest in July and have run through until now. When the next set of quarterly figures are released, they are likely to be worse, which may help to explain why Government is now so intent on cutting its expenditures.