Recent financial turmoil in some emerging market economies poses a risk to New Zealand's recovery and could even tip the country into recession if it becomes more serious, the New Zealand Institute of Economic Research warns.
"We see this as a potential risk. It is not our central forecast," said NZIER principal economist Shamubeel Eaqub.
But he noted that New Zealand had underestimated the Asian financial crisis in 1997 and its exposure to emerging markets had increased since then.
"Although we haven't seen a big pullback in exports yet, it is something that is worth watching. And when I start to see headlines that India is trying on capital controls, even though very mild at the moment, it sets off alarm bells."
The risk is that some of the strength of emerging markets in recent years may have reflected easy money and hot capital inflows as central banks in much of the developed world resorted to measures like quantitative easing in the wake of the global financial crisis.
But now rising US bond yields might slow or reverse capital flows to emerging markets, the institute says in its latest Quarterly Predictions.
"Currencies in bellwether emerging markets like India and Brazil are depreciating sharply," it said.
"While few are forecasting a repeat of the 1997/98 Asian financial crisis yet, there are similarities. Many have foreign currency borrowings, invested heavily in property and property prices are overvalued."
The Asian financial crisis was painful for New Zealand, the institute said.
"Exports fell sharply, particularly forestry and tourism. There was also a sharp pullback in domestic spending, particularly in business investment."
The flare-up in emerging markets comes as China and Australia, New Zealand's two largest trading partners, are already slowing.
"Historically a 1 per cent reduction in global growth leads to a 1 per cent reduction in New Zealand growth."
New Zealand's export trade has become more concentrated.
"Tourism and manufacturing exports have fallen, while dairy, meat and forestry exports to China have surged. While a strong trading partner is important, low diversity of export markets and products makes the New Zealand economy more vulnerable to shocks," the institute says.
The forecasts paint a more cheerful picture of the domestic outlook than the external one, though the institute has pushed about half a percentage point of growth from the current March year to next year, compared with its forecasts three months ago, as the rebuilding in Canterbury gathers pace more slowly than expected.
Auckland led the recovery, Eaqub said, but growth in jobs had stalled and the region was on a "sugar high" of rapidly rising house prices and debt, which had forced the Reserve Bank to respond with restrictions on low-deposit mortgage lending.
"If these policies do not cool borrowing and house price growth the Reserve Bank will raise interest rates. We reckon from March 2014," he said.
The forecasts include a rapid deterioration in the current account deficit from $10 billion to $22 billion, or 9 per cent of gross domestic product, in three years.
"Households have thrown caution to the wind. We are back to using credit cards a lot more than debit cards. We are using houses as ATMs, withdrawing housing equity again after pretty much four years of repayments. All of those things suggest we haven't quite learned our lesson."