The International Monetary Fund says a modest recovery in New Zealand is underway, but warns that could be jeopardised by rising house prices.
The Washington-based organisation forecasts the economy will grow 2.25% this year and peak at up to 3% over the medium term.
The IMF says New Zealand's economy is in good shape, led by rebuilding activity in earthquake-hit Christchurch, while the banking sector remains sound. However, it is still below trend, partly reflecting the effects of the recent drought.
The organisation supported the Government's economic management, endorsing its plan to keep spending in check to make room for increases in reconstruction spending.
However, risks remain, highlighted by growing pressures in the housing market - particularly in Auckland.
Like the Reserve Bank, the IMF warns rising house prices could put further strain on New Zealand's already high debt levels, while it says the country is vulnerable due to its low savings rates and reliance on foreign money to meet its needs.
The IMF estimates house prices are overvalued by about 25% and if they continue to rise strongly, a sudden economic shock could dampen household spending, damage banks' financial positions and hurt the economy.
That may prompt the Reserve Bank to lift interest rates or push out the Government's debt reduction plans.
The Government aims to return to surplus in two years' time, and the IMF says relatively low levels of public debt mean the Crown can delay its deficit reduction plans if there is a severe economic shock.
