There are signs that the housing market and the wider economy is beginning to grow again and that unemployment will not reach 8 percent as earlier predicted, Treasury said yesterday.

Treasury's monthly economic indicators report for August said there was signs of a "fragile recovery" in the global economy and this made a stronger recovery in New Zealand more likely than it had earlier forecast.

This was due to the improved global conditions, higher migration and increasing confidence.

Prime Minister John Key had been more optimistic than many about the economic outlook and he stood by that yesterday.

"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. I believe we will continue to grow more aggressively as the world recovers," Mr Key said.

"I think you are seeing that through the significant increase in prices that Fonterra is achieving in its auctions up 55 percent in two months, an example that global confidence is being restored."

Unemployment had increased faster than Treasury predicted in this year's budget and would continue to rise until next year, though it would peak at around 7.5 percent and not 8 percent as predicted earlier.

Export volumes had increased, though the dollar's rapid appreciation the last six months had limited the gains.

Locally retail sales recorded their first quarterly increase in seven quarters in June and housing prices had been growing moderately in recent months.

The rise in houses prices indicated a recovery in the market in both supply and demand.

Mortgage approvals had eased following a surge in April, but were tracking 5 percent to 10 percent than a year ago.

The activity in the housing market could reflect that the recession had made houses more affordable at the same time as credit availability improved.

The rise in net migration and abating concerns about the effects of the recession were also helping the housing sector.

Treasury had predicted house prices would fall by 10 percent over this year, but the growth in the market would put upward pressure on prices.

"But beyond the short-term, slowing wage growth, high levels of household debt, and expanding supply of houses for sale and rising interest rates will forestall a return to the rates of house price inflation seen earlier in the decade," Treasury said.

Despite the slightly more optimistic outlook, Treasury warned the return to economic growth might not be sustainable.

There had been a recent resurgence in households being offered interest-free deals for consumer durable.

Economic growth fuelled through householders borrowing money would not unwind imbalances in the economy such as the large current account deficit and high debt levels

"This could constrain longer run growth prospects and would make it more difficult for the economy to respond to future shocks," Treasury said.

Mr Key said householders had to determine what level of debt they could afford and risk to have.

"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 said.

It was only a short time ago "people were talking about Armageddon for the financial markets" and while Mr Key believed the markets would recover it had still been a big shock.

"We saw the United States unemployment rate 9.7 percent on Friday night. We are not completely out of the woods yet."

Mr Key said while it was one thing to pull out of recession it was another matter to improve the overall long-term productivity of the economy.

Unbalanced growth was not sustainable and there had to be export driven growth.