Treasury has warned in its monthly roundup of economic indicators that growth appears to be weakening and downside risks have increased since the May 20 budget.
It also warned that foreign debts were expected to increase despite recent falls in New Zealand's current account deficit and strong terms of trade.
"The recovery is expected to continue to be relatively gradual, with the level of real GDP per capita still 4% below its pre-recession level," Treasury said.
"This reflects a more cautious approach by households given high debt levels, changed perceptions about the riskiness of high debt levels and a reduction in credit availability at the more speculative end of the investment spectrum," it said.
The global economy would continue to be constrained by government spending consolidation in many countries.
"Early indicators of growth for the June quarter, including retail sales, suggest continued weakness in private consumption, while exports are likely to ease on the back of reduced dairy exports," Treasury said.
"Factors such as these suggest growth will be a little weaker than forecast. However, both business and consumer confidence measures point to continued growth, even with business sentiment easing a little in June," it said. Record increases in the terms of trade over the last couple of quarters were positive for the economy, incomes and the current account deficit.
"However, future trends are likely to see the current account deficit expand and the level of New Zealand’s international indebtedness continue to increase - a feature which makes the New Zealand economy vulnerable to shifts in investor confidence in a world less tolerant to risk," Treasury said.
"To stabilise New Zealand’s net international liabilities around current levels of GDP would require sustained surpluses on the combined goods and services balance of between 1.25% and 2.25% of GDP, well above the average of the past decade of 0%," Treasury said.
"Even with the favourable terms of trade, it is unlikely that New Zealand will achieve such surpluses without a substantial change in economic behaviour," it said. "Overall, international and domestic developments over June lead us to believe the economy will continue its relatively gradual recovery over the year ahead. Our view as to the most likely path the economy will take remains consistent with the Budget Forecasts. However, downside risks are significantly higher and near term growth likely to be a little weaker than forecast."
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