The fall-out from the European sovereign debt mess is set to depress export growth, the NZIER says.
In its latest quarterly prediction, the organisation said uncertainty around the global outlook would weigh on exports and tourism, which have been a buffer, and on business and consumer confidence and thus spending.
Investment would also remain depressed because banks will find it harder to raise capital overseas.
“New Zealand’s fledgling recovery will be severely hampered by the rapidly worsening global economy”, principal economist Shamubeel Eaqub said.
Should a political solution be found that prevented the Euro area from disintegrating, the NZIER said economic growth would be just 1.5 percent in 2012, gradually rising to 2.5 percent by 2014.
“If the Euro area splits, New Zealand firms should prepare for
another global crisis. This would restrict access to capital and push up
global borrowing costs, in addition to an even weaker export outlook.
"New Zealand would likely experience another recession and the Reserve Bank would need to cut interest rates. We place the odds of such a scenario at about 25 percent”, Eaqub said.
He said the Canterbury rebuild would provide a much-needed injection of building activity from mid-2012.
But the NZIER believes the Reserve Bank will not raise the OCR until mid-2013, and that inflation will be contained as excess labour market capacity keeps a lid on wage growth.