Hawai'i's economy is expected to grow moderately this year followed by slower growth in 2008 and 2009, according to a forecast released today by the University of Hawai'i.

The slower growth comes as Hawai'i's $12 billion visitor industry faces challenges from a weaker U.S economy and fallout from housing and mortgage markets, according to a quarterly report from the University of Hawai'i Economic Research Organization.

"Despite recent financial market turmoil, Hawai'i's construction industry continues to settle toward a soft landing," according to UHERO. "Fallout from Mainland housing and mortgage markets poses a risk, primarily to the visitor industry."

Overall visitor arrivals for 2007 are now projected to decline by 1.4 percent, followed by flat arrivals next year and 1.4 percent growth in 2009.

Slower economic growth is expected to lead to lower inflation; however, it will take several more years before Honolulu inflation recedes to moderate levels, according to the forecast.

"Home price appreciation of the 2000-2006 period continues to feed through into consumer prices, and the recent move by oil prices above the $80-per-barrel threshold could mean another surge in electricity prices as well," the report stated. "We expect the Honolulu (consumer price index) to rise by 4.8 percent this year, gradually cooling to 3 percent by 2009."

Real, inflation-adjusted income growth is forecast at nearly 2 percent growth for 2007, followed by 2.1 percent to 2.2 percent growth in the 2008-2009 period.

The greatest risk to Hawai'i's economy remains in the visitor industry outlook, UHERO said. Of particular concern to Hawai'i is the prospect of further weakening in California home values and the overall performance of the California economy, which could undermine visitor spending.

Reach Sean Hao at shao@honoluluadvertiser.com.