THE ECONOMIC recovery in the euro zone is weakening in the second half of the year but the bloc is still expected to deliver modest growth over the next two years, according to a new forecast.

The report, compiled by Euroframe, a network of 10 think tanks across Europe including the Economic and Social research Institute (ESRI) in Ireland, says high unemployment and the implementation of austerity measures will weaken the pick-up in demand.

However, it still expects growth in the euro zone to rebound this year to 1.7 per cent following a 4 per cent contraction in 2009.

Growth of 3.6 per cent in Germany, the bloc’s largest economy, is expected to be a significant driver for GDP in 2010.

The biannual Economic Assessment of the Euro Area blames the unwinding of fiscal and monetary stimulus packages, sluggish demand and high household debt for holding back growth.

It expects labour markets across the euro zone to remain challenging over the next two years.

The euro zone will continue to lag the world’s largest economies with growth in the US is expected to hit 2.6 per cent this year and remain above 2 per cent for the next two years. China expects to see double-digit growth this year before moderating to about 9 per cent in 2011.

Euroframe says the forecasts contained in this report are subject to significant uncertainty. “In particular, the forecasts . . . are critically based on the assumption that the European sovereign debt crisis is contained and is resolved swiftly.”