The Cayman Islands economy appears to be recovering slowly from its prolonged recession, and while dark spots linger, some good news has emerged as government statistics limn the last part of 2010.

According to a report released on Friday by the Economic and Statistics Office, domestic output declined for the third consecutive year, led by slowed financial services and a population decline from 2008’s 57,000 to 2009’s  55,250 to mid-2010’s 54,397.

Gross domestic product in 2010 contracted 4% percent to $2.3 billion, led largely by a 3.2% decline in services, which accounts almost entirely, 94.6%, for Cayman’s GDP.

Per capita income fell 1.8% to $42,605 from 2009’s 43,363 and 2007’s $48,763, although that figure ranks No. 9 in the 2010 world rankings, ahead of Switzerland and just behind Hong Kong and the U.S.

Inflation, in 2010,rose 0.3% as compared to 1.5% decline the preceding year. The increase is due mostly to spikes in the cost of food and fuel.

Interestingly, as foreign labour declined, local unemployment rose, contradicting popular sentiment that foreigners had taken jobs from Caymanians. At the end of 2010, immigration authorities had issued 20,452 work permits, compared with 23,531 at the close of 2009. In contrast, however, local unemployment rose to 2,396 people from last year’s 2,180, an increase of 6.7%.

The construction industry, wholesale and retail trade, real estate, renting and business activities, and financing and insurance services were hardest hit.

Disastrously, construction fell another 24% in 2010, after a nearly 30% drop in 2009. The latest fall, the report said, was mainly due to a 42% drop in building permits and a 25% fall in capital and net lending expenditures by central government

Financing and insurance services, approximately 43% of GDP, declined less in 2010, almost 4%, than the previous year, when it plummeted 14.4%.

Reductions in imports led to a 6.5% fall in wholesale and retail trade, while real estate, renting and business activities dropped 2.4% because of fewer rentals and fewer property transfers, likely a result of falling population.

Transportation, storage and communication fell 3.7% and production of government services fell 2.1% as government’s recurrent expenditures declined 2.5%, after last year’s 2.8% growth.

Meanwhile, however, hotels and restaurants grew by 6.%, pacing the growth in stay-over tourism, as both air arrival and cruise arrival rose.

If construction and rentals declined, however, so did demand for electricity and water. Consumer imports fell, and reduced government expenditures translated to a budget surplus of $19.8 million, a significant improvement from the previous year’s $39.7 million deficit.

Similarly, overall fiscal balance showed a smaller deficit of $62.4 million compared to $149.3 million in 2009.

GDP growth for 2011 is projected at nearly 1% due to an expected recovery in tourism and the stabilisation of financial services. Inflation, however, is expected to reach 1.9% because of continuing prices rises in food and oil.

Premier McKeeva Bush predicted modest, if steady growth, through 2014. “Based on the forecasts made for the local economy, along with the prediction of modest worldwide growth, and coupled with the supportive actions of the government for private-sector projects in the Cayman Islands, there is the bright and encouraging likelihood of growth within the Islands’ economy for the 2011 calendar year and beyond that to the government’s fiscal years that will end on 30th June 2012, 2013 and 2014”.