Is Bermuda recovering from its recession? The short answer is no. In fact, it's getting worse. In July I wrote an article ('Bermuda is still in recession' – July 19, 2010) in which I calculated Bermuda's Gross Domestic Product (GDP), a common measure used by economists to gauge overall economic growth. I have continued my analysis for the second quarter. What follows is not an attempt to get a completely accurate number for the GDP figure but an attempt to discern a general level and direction of growth for Bermuda.

Based on my preliminary analysis, it would appear Bermuda's economy has decelerated further and contracted by approximately 1.4 percent in the second quarter (this compares to my estimate of a 0.5 percent decline in the first quarter). This again may not be surprising to many Bermudians but the fact that growth is actually worsening is a bit concerning. Especially when one contrasts this with the ongoing recoveries in other developed nations which have been seeing positive economic growth for over a year now.

Looking through the details, we can get an idea of where the weaknesses and strengths are. My calculation continues to use published Government data and divides GDP into its four common components in an attempt to calculate their respective growth rates: consumption, investment, government spending, and net imports.

In the consumption column I have estimated a decline of 2.9% year over year in real terms. It's not shocking news to note that retail sales continue to plunge year over year. They dropped by an additional 3% in the second quarter. Notable laggards continue to be motor vehicle sales and building materials.

Bermudians are clearly concerned about their financial situation and are likely hesitant to make big purchase decisions on items such as cars – sales fell approximately by 20% for the second quarter. The bear market in construction also continues unabated. Sales for materials likely declined by about 25% in the 2nd quarter - falling even more than a roughly 18% contraction in the first quarter. With the value of new construction projects in place falling to the second lowest level ever recorded in the Government statistics provided, this sector is not likely to rebound soon.

In fact, if you look at the September retail sales report, gross receipts of building material and hardware supplies posted their greatest year over year decline in over ten years – negative 32.4%. Resident purchases abroad are also contracting and look to have fallen some 5% in the 2nd quarter. Little support seems to be coming from growth in employment incomes for the quarter which contracted at a 1.71 percent rate in real terms. Income growth is not keeping up with inflation in Bermuda (real income growth also fell in the first quarter of 2010 by about 1.5 percent). Without real income growth it is very unlikely Bermuda can see some form of overall consumption expansion.

If there is one portion of GDP that seems to have collapsed it is investment. From my estimate investment activity plummeted some 17.7% year over year. Machinery orders continue to be weak and this probably dovetails with the weakness in overall construction. Clearly without new projects and/or local business expansion, investment is unnecessary and has been curtailed extensively.

Government's contribution to growth in the second quarter also appears to be negative. Government expenditures appear to have fallen about 8%. Wages, salaries and employee overhead have fallen in real terms by roughly 2.2% and other goods and services expenditures have also contracted by about 12% in real terms.

The shining star for Bermuda's economic picture in the second quarter was net exports. This looks to have surged 29.5%. Imports actual fell slightly (consistent with a weaker domestic consumption profile) and exports for services surged. The large contributor was the travel industry which enjoyed a very good tourism season compared to prior year's depressed quarter.

In looking through more recent releases, I do not see any signs of recovery at hand. Retail sales continue to contract and have fallen now for some 30 months in a row. Aggregate domestic demand does not appear to be recovering in anyway. New construction projects are virtually nil so future investments will likely contract even further until the hospital and hotel projects begin next year.

The total number of registered businesses in Bermuda actually fell 1% in the second quarter. International business likely will not contribute meaningfully to growth over the next few quarters as the insurance market remains soft, the hedge fund administration industry is shrinking and the banking sector is restructuring. Commercial and residential real estate continues to soften with some notable excess capacity (more on this in a future article). Employment continues to be a drag as layoff announcements continue. Inflation is also not helping as September's run rate of 3.4% shows acceleration in the cost of living. While the rest of the developed world is showing somewhat tame to decelerating inflation costs Bermuda's escalating cost of living is making it virtually impossible to see real income growth.

The first most obvious implication for the continued weak growth in Bermuda is that it's not likely that the 1% GDP growth target articulated in the Budget for this year is possible. In fact, it's more likely that GDP will come in at a negative 1% in real terms for 2010. As a result there may be a major shortfall in Government revenues. With overall retail activity soft and purchases abroad contracting it is unlikely that estimated duty revenue will be obtained. In fact, if we take into account the further weakness we are seeing in the third quarter, it's likely that the Government will see a substantial shortfall in revenues.

Weak domestic consumption and contracting real incomes do not bode well for retail sales. I would not be shocked to see further contraction in the retail sector of Bermuda with additional business closures. Furthermore, it is likely that we will continue to see a softening in residential rents and commercial lease rates. Falling net migration and real disposable income are not supportive to prices rises for these assets.

Ultimately, Bermuda faces a serious risk of entering into a period of prolonged contraction associated with rising unemployment, falling real wages, and declining asset prices.

Nathan Kowalski is the chief financial officer at Anchor Investment Management. He holds a Chartered Financial Analyst (CFA) designation and Chartered Accountant (CA) designation.