New bumps might be ahead for Hawaii’s already drawn-out economic recovery.

High inflation, and rising interest rates intended to curb inflation, will likely sap some local economic growth this year and next year to prolong Hawaii’s rebound from a downturn triggered by COVID-­ 19 two years ago, according to a new report.

The state Department of Business, Economic Development and Tourism said in a report released Wednesday that it expects Hawaii’s economy to grow 2.6% this year and 1.7% next year instead of 3.2% and 2.5%, respectively, as the agency forecast in May.

Expressed in dollars spent on goods and services statewide, DBEDT’s downward revision amounts to $440 million less this year and $1 billion less next year.

Eugene Tian, the state’s chief economist, characterized such a reduction as “modest” given that the value of all goods and services adjusted for inflation, otherwise known as real gross domestic product, was $74 billion in Hawaii last year.

The primary reason for anticipated smaller economic growth ahead is the negative impact of rising interest rates and costs on Hawaii’s construction and real estate industries.

“Investment mainly in terms of construction will be slowing down,” Tian said. “It will last maybe until next year.”

Much of this expected slowdown in construction will be in housing, as it becomes more difficult to finance new projects and keep prices attractive while facing higher material and labor costs.

Already, there has been a slowdown in demand from homebuyers partly because home prices are at record highs and mortgage rates have risen.

DBEDT said in its report that the volume of homes sold statewide fell 5.5% during the first half of this year compared with the same period last year.

The federal government calculates inflation every two months for Honolulu, and this year through July the inflation rate averaged 6.8%. That compared with rates around 2% for much of the past decade. Inflation for Honolulu has been subsiding since hitting 7.5% in March, slipping to 7% in May and 6.8% in July.

Much of the high inflation in Hawaii is concentrated on the price of electricity, gasoline and food.

“Inflation is definitely causing a lot of pain,” Carl Bonham, executive director of the University of Hawaii Economic Research Organization, said Wednesday during an appearance on the Honolulu Star-Advertiser’s “Spotlight Hawaii” webcast program.

There were some positive elements in DBEDT’s report.

One is that the state’s main economic driver, tourism, is maintaining a good rebound since being derailed two years ago by the coronavirus pandemic. DBEDT noted that there have been 5.4 million visitor arrivals this year through July, representing 86.8% recovery from the same period in 2019. Visitor spending, meanwhile, is already at record levels in part because of inflation.

The agency expects the tourism industry’s recovery to continue, especially with international visitors returning in significant numbers later this year.

Unemployment also was a bright spot. DBEDT noted that the number of people employed on company payrolls or self-employed in July, adjusted for seasonal differences, was the highest since March 2020 right before the pandemic slammed the economy. This, DBEDT said, represented a 97.3% recovery compared with July 2019.

DBEDT projects that Hawaii’s unemployment rate will be 3.8% this year, and then dip to 3.6% next year. The rate in 2019 was 2.4%, then spiked to 12% in 2020 and fell to 5.7% last year.

Another positive element in DBEDT’s report is that even its reduced level of expected economic growth would be higher than U.S. economic growth, which is expected to be around 1.5% this year and 0.7% next year.

However, the reason for this is mainly because the U.S. economy fully recovered last year from the downturn brought on by COVID-19.

“Hawaii’s economy is still in the recovery process,” Tian said.

DBEDT produces its economic forecast quarterly, and agency officials noted that there are some uncertainties that could affect the next forecast and Hawaii’s economic recovery.

The agency said rising tensions between countries in Asia and the Middle East will hit an already disrupted global supply chain, potentially driving up inflation, especially affecting construction costs for developing high-rise buildings.

Mike McCartney, the agency’s director, mentioned other troubles including employers in Hawaii grappling with a labor shortage, the continuing war in Ukraine, COVID-19 still being a worldwide problem and slowing economic growth for the U.S. and countries around the globe.

“These will all impact our recovery progress and add uncertainty to our economy and our daily lives,” he said in a statement. “However, we expect the impact to Hawaii to be less than the rest of the world’s economies.”

Bonham said recessions globally and in the United States are possibilities that could affect Hawaii’s economic recovery. He added that if there is a U.S. recession, it would probably be a moderate one that has some negative effect in Hawaii.

“Because we’re still in recovery … there’s a chance that we’ll get through this with just a modest slowdown,” he said. “Sort of a growth recession, if you will, where you continue to grow but the unemployment rate goes up a little bit, jobs get a little bit harder to find and inflation comes down.”