Hawaii’s economy is expected to slow in the second half of this year but still grow at a faster pace than earlier projected.

The state Department of Business, Economic Development and Tourism on Tuesday revised upward its growth forecast for the year to 3.9% from 2.7% projected in its August report. The upward projection followed recently revised and higher economic growth estimates issued by the U.S. Bureau of Economic Analysis.

DBEDT said in its fourth-­quarter forecast that economic growth rates slowed in the second half of 2021 due to the surge in delta variant cases, which hampered recovery in tourism and other local industry sectors.

But the full-year forecast averaging the four quarters is projected to be 3.9% after BEA in October revised upward its Hawaii economic growth rate to -1.3% in the first quarter (an improvement from -5.2%) and an estimated 12.6% in the second quarter for a combined growth rate of 5.3% during the first half of 2021.

DBEDT Director Mike McCartney said the state’s overall economy continues to gain momentum and is on its way toward a healthy recovery with the inflation-adjusted gross domestic product — as measured by the state’s total output of goods and services — expected to grow to $73.4 billion from $70.6 billion a year ago. The 2021 forecast is 92.7% of the 2019 level.

“Record levels of home and condo sales, construction projects, infusion of federal funds, domestic visitor arrivals, and consumer spending have accelerated this recovery,” McCartney said in a statement. “Future economic growth is dependent upon us remaining vigilant in controlling and containing the COVID-19 virus and any of its variants. Strong public health policies, protocols, and procedures are imperative for economic growth and momentum.”

DBEDT’s forecast for visitor arrivals is 6.8 million for 2021 and in line with what was projected in its previous forecast. That represents about a 66% recovery from the record 2019 level of 10.4 million arrivals. Visitor arrivals are projected to increase to 8.9 million in 2022, 9.5 million in 2023 and 10 million in 2024. The current projection indicates that visitor arrivals will not reach the 2019 level until after 2024.

Visitor spending is projected to be $12.7 billion in 2021, which is about a 71% recovery from the 2019 level. Visitor spending is projected to grow at 24.6%, 8.3% and 5.2%, respectively, for 2022, 2023 and 2024.

DBEDT said that the state’s retail tax base (total retail sales before applying the general excise tax) in the first half of the year was near record levels and reflected robust economic growth.

The state’s second-quarter retail tax base was $10 billion, the second-highest quarterly sales in Hawaii’s history and just shy by $13.5 million of the record first quarter of 2020. In addition, the contracting tax base (the majority is for construction activities) also had the second-best quarter in history at $2.64 billion (just $4.2 million short of the record level of $2.65 billion in the third quarter of 2020) over the same period.

McCartney said job recovery and consumer inflation are challenges now faced by the state.

“Though our real GDP has recovered from the pre-pandemic time, our non-agriculture payroll job recovery is falling behind at 86 percent and the hospitality sector recovery was only at 74 percent during the first 10 months of 2021,” he said. “Job recovery is a slow process among all the economic indicators even with the help of all levels of governments including the infrastructure bill by the federal government and the extra-large amount of state and county government general obligation bond sales. As tourism recovery accelerates in December and into 2022, more workers will be called back in the coming months.”

DBEDT forecast nonagricultural payroll jobs to increase by 2.1% in 2021, 6.1% in 2022, 3.3% in 2023 and 2.4% in 2024 and not reach the pre-pandemic 2019 level until after 2024.

Honolulu inflation is expected to increase in 2021 to 4.1%, from 1.6% in 2020, and will drop to 2.9% in 2022 before it eventually falls to the long-term average of 2.0%.

“Energy cost is the major driver of Hawaii consumer inflation,” McCartney said. “Therefore, the release of the reserved oil (50 million barrels from America’s strategic reserve) will help to slow down our inflation. We expect the (Honolulu) consumer inflation rate will be much better in 2022 than it is now.”