New Zealand's top economic risk is Australia: PM Key

New Zealand Prime Minister John Key
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New Zealand Prime Minister John Key

While the drivers for New Zealand's economy remain largely intact, a sharper-than-anticipated slowdown in neighboring Australia poses a threat to growth, Prime Minister John Key warned.

"The big drivers of economic growth are net migration being strong, the Christchurch rebuild adding a lot of stimulus and huge investment in Auckland happening in infrastructure, and generally, putting dairy to one side, commodity prices being quite strong, it's all going to help us," Key told CNBC.

"But if you say what can trip us up, unquestionably Australia is a big factor, because [it's] a big part of our economy," he added.

Other risks stem from a continued loss of momentum in China's economy as well as the domestic housing market, he said.

Australia – New Zealand's largest trading partner – is a critical destination for Kiwi producers and manufacturers. Last year, New Zealand exported almost $9 billion of goods to Australia, creating 18 cents of every dollar of export revenue New Zealand received, according to the New Zealand Institute of Economic Research. Its top bilateral exports are oil, gold, wine and cheese.

As such, the strengthening of the New Zealand dollar against the Australian dollar has become a headache for the country's export and tourism sector.

"[Australia is] our largest source of tourists by quite some margin. It won't stop them coming, the question is will they just spend a little less when they're here. If they bring $5,000 to spend over the weekend, they'd probably still bring $5,000 but if the exchange rate is a little worse, they will spend less in local currency," he said. "So we do worry about that with Australia."

The Kiwi dollar, as it is known, has strengthened 6 percent against the Aussie over the past year.

Rockstar economy

New Zealand's economy has been the envy of the developed world with steady growth, falling unemployment and low inflation.

The economy expanded 3.3 percent last year, the fastest since 2007, underpinned by its tourism sector, construction activity and net immigration – which has supported jobs growth and spending.

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One point of concern, however, has been the slump in the price of dairy products – the country's biggest export – amid rising global production and declining demand from China.

"With dairy, there's no question it's going to have some impact. We think of current dairy prices as about a $6 billion impact on the economy and our gross economy is about $220 billion, so you can see that impact," he said.

Nevertheless, Key says the government is unlikely to step in with assistance for the flagging industry.

"I think we'd say no in terms of directly trying to prop up farms that don't make it," he said

"What we can do for the industry rather than just prop up a few farmers is heavy investment in science and innovation, doing what we can to ensure farm productivity remains."