New Zealand's economy will return to growth in the final quarter of 2009 though the recovery will be "fragile," will the unemployment rate continuing to rise, according to the New Zealand Institute of Economic Research.

The research firm forecasts the economy will shrink 1.8 per cent in the year through March 2010, before expanding 3 per cent in the following 12 months. The jobless rate will peak at about 8 per cent in late 2010, from 6 per cent currently.

"The New Zealand economy is on the cusp of a fragile recovery," said Shamubeel Eaqub, the NZIER's chief economist. Risks to the recovery include the impact of a high New Zealand dollar, which saps export returns, and rising interest rates, he said.

The think-tank's latest projections come after a bank survey showed business confidence continued to improve last month amid a resurgent construction sector and stabilising property market. A net 34 per cent of firms expect general business conditions to improve in the next 12 months, up from a net 19 per cent in July, according to the National Bank Business Outlook.

Reserve Bank Governor Alan Bollard yesterday told Radio New Zealand that the nation's recovery is still fragile and could be derailed by volatile world markets.

He made the comments after attending a Federal Reserve retreat for central bankers. Bollard has said interest rates will stay low until the second half of 2010.