WELLINGTON- NEW Zealand's economy should return to growth this quarter, Prime Minister John Key said on Monday, but warned recovery would be fragile while unemployment was set to rise further.

'My view is that the economy is tracking along the lines I thought it would earlier on in the year, which is I believe we will be growing in this quarter,' he told reporters.

'I believe we will continue to grow more aggressively as the world recovers.' But he cautioned that New Zealand was 'not completely out of the woods yet'.

'I think everyone is conscious of the fact that while it is encouraging the signs we are seeing internationally, this is nevertheless a fragile recovery and anything is possible.'

Mr Key's comments followed a report by the Treasury that also pointed to a quicker than expected recovery from the recession, which started at the beginning of 2008 and was prolonged by the global economic crisis.

The improving outlook was due to improving global conditions, higher migration and increasing confidence, the Treasury said in a monthly summary of economic indicators.

There were signs that the housing market and the wider economy were beginning to grow again.

Unemployment was now likely to rise from the current level of six percent to around 7.5 per cent rather than eight percent previously forecast.

Export volumes had risen, although returns had been limited by a strong New Zealand dollar.

Retail sales rose for the first time in seven quarters in June and housing prices had climbed slightly in recent months.

Lower interest rates, rising net migration and improved consumer confidence were helping the housing sector, the Treasury said.

But it warned that the recovery may prove unsustainable because it would likely be based on domestic consumption.

Imbalances such as the current account deficit, which is among the highest in the developed world, and debt levels may not be significantly unwound, the Treasury said. -- AFP