Hawaii might escape the worst of the looming U.S. recession, but its economy is not expected to start making satisfactory progress until 2024, according to a new forecast released Thursday by the University of Hawaii Economic Research Organization.

UHERO expects the U.S. economy will end the year with 1.6% annual growth. Its economists are forecasting a recession for the first half of 2023, limiting next year’s growth to 0.2%, with a return to 2.2% growth in 2024.

However, during a news conference Thursday, UHERO Executive Director Carl Bonham said that “the main story for Hawaii is just that we are out of sync with the the rest of the country.”

Bonham said the urban myth that when the U.S. goes in one direction, Hawaii follows six months later is not true.

“If you look at past recessions, two out of the last four past recessions, Hawaii basically grew right through the U.S. recession or at least grew much more than the U.S. economy did, which was shrinking,” he said. “So there is a possibility that Hawaii could get through this without much of a downturn, and it’s mostly because we are still in recovery mode. We still have a ways to go.”

UHERO said in its forecast that Hawaii probably will not see an outright contraction in economic activity. However, anticipated softer global conditions, further interest rate hikes and temporarily high inflation will negatively affect the state. Also, given the perilous path facing U.S. and global economies, UHERO said significant downside risks exist for Hawaii.

A wild card appears to be the anticipated return to Hawaii of international visitors, who unlike U.S. visitors are still well below pre-pandemic levels.

“What we are seeing right now is a forecast with a U.S. recession, and if you were relying on 95% of your market to come from the U.S., that’s a challenge,” Bonham said. “So remember we’re forecasting a decline in U.S. visitors, while you have an increase in international visitors.”

Visitors to Hawaii from Japan in July were still down nearly 83% from July 2019 and about 93% for the first seven months of 2022, according to the latest tourism statistics from the state Department of Business, Economic Development and Tourism.

Still, air service between Japan and Hawaii has been building. In July, All Nippon Airways resumed service to Hawaii on its 520-seat A380 superjumbo jets. In August, Japan Airlines relaunched nonstop service between Tokyo and Kona.

Delta Air Lines is resuming direct service between Tokyo and Honolulu on Dec. 1, and Hawaii Tourism Japan expects Korean Air will make an announcement soon about the resumption of direct flights.

Bonham said UHERO’s economic forecast assumes that Japanese visitors, who in pre-pandemic days made up Hawaii’s largest international market, return to 50% of their 2019 arrivals volume during the first quarter.

“Our forecast would be different if there was a reason for us to say that the Japanese visitors weren’t going to get back to even 50% of pre-pandemic levels,” Bonham said. “If Japanese visitors did not grow from where we are right now, if international visitors did not grow and the U.S. decline proceeded as forecast, then Hawaii would probably be in a recession, and we would have outright job losses rather than small job growth.”

Bonham said Maui and Kauai, which are more dependent on domestic visitors, will see greater economic decline than Oahu and Hawaii island, which have a greater mix of international visitors and more economic diversity.

“The problem for Maui and Kauai is really that we expect a decline in U.S. visitors really from here on and a decline in spending from those markets,” he said. “And so what happens on Oahu and the Big Island is more that the return of the Japanese and other international visitors sort of offsets that.”

But Bonham said all islands are facing difficulties because of high inflation, which is running lower in Hawaii than on the mainland but is nevertheless inflicting pain on local households and businesses.

“All families are facing very high grocery bills,” he said. “And everybody is going to be dealing with continued increases on interest rates.”

Regardless of whether the U.S. or Hawaii enters into a recession, the state’s worsening economy is already causing pain, and local businesses, especially small ones, say they are poised for more.

Retail Merchants of Hawaii President Tina Yamaki said the price of everything is going up for retailers, who are seeing customers becoming more cautious about how they spend their money.

Higher interest rates also are negatively affecting businesses, especially for those with owners who are are still carrying pandemic-related debt, she said.

At the same time, Yamaki said Hawaii’s minimum wage goes up Oct. 1 to $12 an hour, an expense that she said many retailers did not budget for earlier in the year because they assumed the increase would come later.

Bonham said he doesn’t expect the current minimum wage increase to have much impact on Hawaii’s economy, as most employees are already above the $12 hourly level.

However, Yamaki said the impact of minimum wage hikes are broader, as they often cause employers to have to increase pay rates at higher levels, too.

“If I’m a high school student and I’m making $12 an hour now, my supervisor can’t be making $12 an hour. You don’t want to be paid less than your assistant,” she said.

Yamaki said the lack of international visitors, who tend to spend more, also is still hurting retailers.

“We still haven’t seen the Japanese travelers come back, and even if they do, they are expected to pay exorbitant fuel surcharges and their yen is weak against the dollar, which means they don’t have great purchasing power,” she said.

Yamaki said the downturn is hurting local companies more than national and international businesses, which have greater support.

“We’ve already seen a few stores close their doors,” she said. “We hope more aren’t going to close their doors. But in reality, it probably will happen. How many will close is the million- dollar question.”

Retail analyst Stephany Sofos said she also has seen a slowdown in Hawaii’s residential real estate market, especially in secondary and ancillary areas.

“The interest rate hikes are affecting the secondary and ancillary markets more as these are the markets where the buyers generally need mortgages,” she said. “As of yesterday the interest rate on a 30-year mortgage was over 6%, compared to just over 2% a year ago — that’s a significant change in buying power.”

Sofos said on the positive side, higher interest rates will slow the pace of the residential real estate market and eventually will lead to price contractions that will create opportunities for some buyers.