The Treasury is forecasting the the economy to grow at an annual rate of around 2% over the second half of this year as the pace of economic recovery picks up.
The Government's economic advisor says domestic activity has strengthened, citing higher house and retail sales, migration gains and building consents.
However it warns the jump in business and consumer confidence may not translate into actual investment and spending, stunting any recovery.
The Treasury says growth in the country's main trading partners has also risen from 1% to about 3% for 2010, though the strong New Zealand dollar is eating into exporters' returns.
Last week, the Reserve Bank left the Official Cash Rate on hold at 2.5% and said there was no rush to raise interest rates. It expected to hold rates at the same level until the second half of next year.