Finance Minister Paula Cox believes that Bermuda is going into recession.

During her Budget statement yesterday, Ms Cox said she estimates the Island's Gross Domestic Product (GDP) will fall by one to 1.5 percent this year.

That will be no surprise to the dozens of people to have already lost their jobs over the last few months or to the business owners who have seen trade fall off, or to the landlords who are having to reduce rents to attract a tenant.

But the recession does not become official until two consecutive quarters of negative economic growth have been recorded.

The Ministry of Finance's National Economic Report — the basis for Ms Cox's comment on negative growth — provides a gloomy outlook for the economy in 2009.

Its message is that the fortunes of Bermuda are tied to the US, as it is the Island's largest trading partner and provides more than 70 percent of our visitors.

"With most indicators suggesting the US economy will worsen in 2009, the implications for Bermuda are a slowdown in economic activity," the report states.

However, the Ministry does anticipate growth in the main pillar of the Island's economy, the international business sector, where it sees slower, but positive growth "in very challenging circumstances".

The report revealed that the sector employed 4,701 people in 2008, an increase in 12 posts from the year before.

There were 15,201 international companies registered on the Island at the end of last year, 177, or 1.2 percent less than at the end of 2007.

New incorporations of exempted companies fell 27.7 percent to 1,032 and 40 of those were reinsurers, compared with 71 new reinsurers in 2007.

The trend through the first few weeks of 2009 has been downward. Insurers have lost billions in recent months as the value of their investment portfolios has plummeted amid turmoil on the world's financial markets.

At the same time, many of them have had to pay out hundreds of millions of dollars more in claims after an unusually high number of catastrophes.

Many CEOs are upbeat about the prospects for this year, because the decline of capacity in the industry will put an upward pressure on insurance reinsurance rates. Reinsurers reported big increases in rates during the January renewal period.

But the effect of the ongoing economic slowdown will mean there is less out there to insure, conteracting the effect of higher insurance prices.

Fund managers have seen their businesses contract in the light of falling asset values and withdrawals by nervous investors, leading to job losses at the likes of Butterfield Fulcrum Group and Ernst & Young.

While the report anticipates that international business will continue to drive the economy this year, it adds: "There is a low prospect of employment increases in this sector for 2009."

Tourism is likely to be worse hit, as the downturn is expected to dampen demand for business and leisure travel alike. "Visitor arrivals were down 4.6 percent in 2008 and are likely to decline further in 2009," the report states. "Hotel occupancy rates were down 12 percent and retail sales slowed. these trends are also expected to continue in 2009."

Hotel developers will find it more difficult and more expensive to borrow money to fund their projects. And so the report concludes that Bermuda's GDP can expect a "flat to negative" contribution from tourism.

Over the first three quarters of last year, the construction industry was thriving in Bermuda, driven by office building projects all over Hamilton, increasing the value of work put in place by 7.1 percent over the same period the previous year.

"However, in 2009 there is likely to be reduced construction activity following the completion of various major projects," the Ministry of Finance reports.

"The Government is providing stimulus to this sector with projects such as the Hamilton Police Station and Magistrates' Court and Loughlands, which are in progress. Anticipated Government projects which should come on line in 2009 include the Tynes Bay expansion and several housing initiatives."

Higher unemployment levels are expected this year, producing lower levels of income and a cutback in consumer spending. That will make for a challenging year for retailers, who have just emerged from a 2008 in which retail sales fell 10 months out of 12.

There may be a few bright spots amid the gloom despite the dramatic reversal of economic fortunes for a country that has enjoyed uninterrupted growth since the mid-1990s.

Economist Craig Simmons believes the recession will have a calming effect on expectations and temper the culture of consumption.

"People's desire to amass wealth will moderate, as will consumer spending on clothing, motor vehicles and gasoline, and investment spending on buildings, homes and equipment," Mr. Simmons said yesterday.

"As spending slows, so too will firms' need for employees. Incomes will fall and spending will decrease further. One bright spot to this outlook is falling prices. The conditions are ripe.

"Locally, there is an overhang of unsold condominiums and rising vacancy rates for housing as foreign workers leave the island. These will exert downward pressure on real estate prices and rents."

The hefty increases in the cost of living we have all experienced over the past decade are unlikely to continue this year.

"Globally, oil is 50 percent cheaper now than it was a year ago, and food prices are down by almost 20 percent," Mr. Simmons said. "Gasoline prices have already started to fall and electricity prices should follow within a month or two.

"As the recession deepens, we should see further price decreases. I expect inflation to be no more than three percent in 2009."