It came as he attempted to evade questions over details of the $25 billion-plus future submarines project which has major employment implications for South Australia in particular. 'Worse is to come'. He subsequently retracted the Holocaust reference and apologised fully, but the incident revealed the political importance of the jobs market as unemployment climbs higher. More than 12,000 jobs were lost in January, most of them full-time positions. And economists warn the rate could go higher before coming down. The sharp increase has added to the complexity of framing the May budget, with the likelihood that it will now take on a more stimulatory role than had previously been planned. This would make Treasurer Joe Hockey's insistence on continued harsh spending contractions counter-productive.

The labour market shock has instead strengthened the arm of Mr Abbott who, since tanking in the polls and surviving a "near death experience" in the leadership spill attempt earlier in the week, has been assuring colleagues that the next budget will be more family friendly, putting money back into households and small business pockets. Illustration: Ron Tandberg. Liberals MPs have been flummoxed this week by the apparent contradiction over the future of stalled savings measures such as the Medicare co-payment and higher education reforms, neither of which have much hope of passing the Senate. A showdown over the direction of budget policy, which was already looming given the mixed messages emanating from Mr Abbott and Mr Hockey, appears to have tipped in favour of the Prime Minister, suggesting harsher measures could be postponed, further diluted, or abandoned altogether. Put on notice over his own job earlier this week by his colleagues, Mr Abbott faced hostile questioning in Parliament about the jobless rate with the opposition calling on the government to stop focusing inwardly.

Mr Abbott acknowledged what he called "disappointing figures" but said "213,000 jobs were created last year". "The rate of jobs growth last year was three times, was three times the rate achieved in the last year of the former Labor government," he said. Mr Abbott also pointed to a recent increase in confidence. "ANZ job ads have now increased in each of the last eight months and are up 13.6 per cent ... the Dunn & Bradstreet business expectation survey just released has found that the outlook on employment is the most positive it has been for 10 years." Mr Hockey also pointed to the upside. "Whilst today's job figures are extraordinary and disappointing, the fact remains that since we came to government we have seen job growth at three times the speed of what it was under Labor and their last year of government," he said.

Australia's jobless rate has not been this high since Mr Abbott was employment minister in the Howard government. The surprise unemployment spike overshadowed the fall in unemployment in December. It comes after the Reserve Bank cut interest rates to 2.25 per cent last week, citing weak economic activity and an expected rise in unemployment. The losses put a dampener on the past three months of exceptionally strong jobs gains, where 101,000 new jobs were created between September and December. This fall in employment, combined with an unchanged labour force participation rate, saw unemployment rise from 6.1 per cent to 6.4 per cent, its highest since June 2002. Economists say another interest rate cut could be expected this year, possibly next month.

"We had thought unemployment would peak at 6.5 per cent this year, but that is at risk of proving too optimistic," Shane Oliver, chief economist of AMP Capital, told clients. David De Garis, National Australia Bank economist, said unemployment could rise even higher now, possibly hitting 6.6 per cent this year. "With an economy still set to grow within its means and materially evident labour market slack … the door remains open for the RBA to ease again, something we expect not to occur before May," Mr De Garis said. But economists also say there are signs the employment market will improve later this year, because forward-looking indicators of the jobs market, such as ANZ job ads and the employment component of the NAB survey, point to jobs growth ahead – but not for the next six months. In Parliament, Mr Abbott was asked to come clean over suggestions that the Australian government has already reached an understanding with Japan to supply the next generation submarines.

"Under members opposite defence jobs in this country declined by 10 per cent," he said. "There was Holocaust of jobs in defence industries under members opposite ... I'm sorry and I withdraw." Follow us on Twitter