In its interim forecast, the European Commission said the eurozone economy would contract by 4% this year, despite a probable return to growth in the current quarter partly as a result of fiscal and monetary stimulus.
In its latest economic forecast, the Commission predicted the economy would grow by 0.2% between July and September and by 0.1% in the final quarter of the year.
Meanwhile, the EU's statistics arm Eurostat said industrial output in the eurozone dropped by 0.3% in July, down 15.9% from July 2008.
"The EU economy appears to be at a turning point," according to the Commission's interim forecast, which looks at the EU's seven largest economies - Germany, France, Italy, Spain, the Netherlands, Britain and Poland, making up 80% of the bloc's gross domestic product.
EU Monetary Affairs Commissioner Joaquin Almunia said the improved outlook resulted mainly from "unprecedented" amounts of money pumped into the economy by central banks and public authorities and expressed worries about further job losses.
"The impact of this crisis on the labour market has a lag of two to three quarters," he said.
According to economists, the further decline in eurozone industrial output in July shows that while the wider economy has probably returned to positive growth in the third quater, the recovery will not be particularly strong.
"The 0.5% fall in eurozone employment in second quarter, after a first quarter 0.7% drop, confirms that the labour market remains in a fragile state. This suggests that last quarter's 0.2% increase in household spending is unlikely to mark the start of a robust pick-up in the consumer sector," said Ben May from Capital Economics.
Stimulus lifts economy out of recession
France and Germany surprisingly emerged from recession last quarter, but there is doubt over whether this was just the result of a huge rise in public sector demand that will eventually have to be cut to get budgets back under control.
Almunia said fiscal stimulus should be kept in 2009 and 2010, but that the euro zone and the EU should map out an exit strategy, with deficits across the bloc expected to be higher than previously thought.
The Commission said the German economy, the euro zone's biggest and often perceived as the EU engine, would shrink 5.1% this year, a better figure than the 5.4% forecast in May. In France, growth should be -2.1%, compared with -3.0% predicted in May.
Poland, which is not part of the euro zone, would be one of few European countries to see its economy grow in 2009, by 1.0% compared to a previous forecast of a 1.4% fall.
Spain, Italy, Britain and the Netherlands would all contract more than previously thought, although the UK economy would return to growth in the third quarter.
Risk of deflation diminished
Eurozone inflation in 2009 will be 0.4%, the Commission said. Price growth will still, however, stay well below the European Central Bank's target of 2%.
The Commission said that while inflation risks were broadly balanced, the risk of deflation has diminished because of a rise in commodity prices.
The ECB earlier this month also forecast a smaller contraction for the euro zone and higher inflation.
(EurActiv with Reuters.)
