Your tiny source footage is being played back in a very large canvas. (like a postage stamp effectively)
ie your source footage is not matched by your sequence setting (dimension)
You can scale up the video to match the HD frame size, but you are going to really hate the results. You are asking Premiere Pro to invent pixels where there weren't any before. It can't make them up out of thin air so it makes all of the pixels a lot bigger and the blurry results will be horrible.
Why are you using such tiny video, and why are you trying to export it so large?