Scott Morrison is concerned about the impact on the jobs market from the tough level four restrictions imposed by the Victorian government to try and stifle that state's coronavirus outbreak.
Reserve Bank governor Philip Lowe has conceded charting the economic outlook is difficult in the face of COVID-19, but the central bank expects unemployment to rise to about 10 per cent by the end of the year.
This would be the result of locked-down Victoria suffering further job losses and more people elsewhere in Australia seeking work.
Dr Lowe expects the unemployment rate to only gradually decline to around seven per cent over the next couple of years.
Two weeks ago, and before the tighter restrictions were put in place in Victoria, Treasury forecast a year-end jobless rate of 9.25 per cent, compared with 5.1 per cent before the pandemic.
"I obviously fear that what we're seeing in Victoria and in Melbourne, in particular, will set us back there," the prime minister told Nine's Today program on Wednesday.
"It's hard news for the people who lose their job and lose their businesses."
The Reserve Bank left the cash rate at a record low 0.25 per cent for another month after its board meeting on Tuesday.
The central bank will shed further light on the economic outlook in its quarterly statement on monetary policy on Friday.
The easing of coronavirus restrictions, and the return of some normality to housing auctions before the Victorian outbreak, has provided a fillip to home lending. However, economists fear this could be short-lived.
The value of loans for new housing rose 6.2 per cent in June to more than $17 billion, the Australian Bureau of Statistics reported on Wednesday.
This followed a 11.6 per cent drop in May.
But despite the modest recovery, lending was still down 10 per cent since March and in the early stages of the pandemic.
JP Morgan economist Tom Kennedy said this was an encouraging development after sharp declines earlier in the year.
"We remain cautious on the outlook for residential investment given elevated unemployment, concerns over the health outlook and depressed levels of consumer confidence are still likely to weigh on activity," he said in a note to clients.
Other data showed the construction sector remains under a cloud as Australia suffers its first recession in nearly 30 years, although the pace of contraction in the industry has slowed.
The Australian Industry Group-Housing Industry Association performance construction index rose 7.2 points in July.
But at 42.7 points it remains below the 50-point mark that separates expansion from contraction.
AI Group head of policy Peter Burn said further falls were recorded for residential building and commercial and engineering construction.
"An encouraging sign was that the pace of contraction slowed markedly overall with only the apartment building sector slumping at a fast pace in July," Mr Burn said on Wednesday.
However the sudden tightening of restrictions on Victorian construction will have an impact across the country.
"(They) will have particularly severe consequences for activity, employment and on many businesses that supply the construction sector in Victoria," Mr Burn said.
Australian Associated Press