Treasury now believes the unemployment rate will peak at 7 per cent, Prime Minister John Key told Parliament today.

Treasury is to release its latest economic forecasts next week along with the Budget Policy Statement.

When the recession began to bite, Treasury feared that unemployment could rise to at least 8 per cent sometime next year.

Mr Key has consistently said he believed Treasury was being too pessimistic and yesterday released data that showed more people were coming off the dole than going on to it.

Labour's employment spokeswoman Annette King said Mr Key was using volatile and potentially misleading data to pull the wool over people's eyes.

The number of people on the dole traditionally fell at this time of the year and the seasonal drop had only been 2.6 per cent this year compared to 5.2 per cent average of the last nine years, she said.

Mr Key said he had just been making the point that despite Treasury's fears about the recession more people had been coming off the dole than going on it.

Ms King asked if Mr Key would lift his estimate of unemployment rates from 7 per cent to 8 per cent in line with the New Zealand Institute of Economic Research's latest forecast.

Instead Mr Key chose to reveal that Treasury would be releasing a new forecast next week.

"When the Minister of Finance releases the Half year Economic and Fiscal Update next week, the deputy leader of the Labour Party (Ms King) will find that, in fact, my predictions are spot on with Treasury's," Mr Key said.

Treasury's latest report on economic indicators, released yesterday, said despite signs of recovery sustainable economic growth was still under threat.

Households were still acting cautiously as they faced limited wage growth, lower employment prospects and considerable levels of debt, it said.

"Overall, these latest economic indicators confirm there are risks surrounding the recovery," Finance Minister Bill English said.

"In addition to weak employment and salary and wage growth, a fall in capital goods imports in the past year points to weak business investment activity in the coming year."

Treasury said with unemployment at its highest level since 2000 at 6.5 per cent, it would take time for the number of employed to increase even as economic growth picked up.

Businesses were on the surface saying they were optimistic, indicating a strong boost to GDP, but their underlying employment and investment intentions did not support a strong rise.

It said positive net migration was helping to boost the housing market and the building sector was starting to recover from historically low levels.

"However, there are risks around the sustainability of the recovery," it said.

- NZPA