Although the Eurozone faces a challenging year with large amounts of public and private sector debt yet to be refinanced, tight credit conditions, further fiscal austerity and more job losses,Ernst & Young said in its Eurozone Spring Forecastpredicting a slow return to growth in 2013. But the European Central Bank (ECB) has to continue to play a central role by being prepared to cut interest rates further and purchasing government bonds in peripheral countries.

With a default on Greek sovereign debt negotiated and a second bailout agreed, and assuming that policy-makers continue to keep up the momentum by putting a credible firewall around Spain and Italy, EEF is forecasting a mild recessionary fall in Eurozone GDP of 0.5 percent this year, with nine of the seventeen Eurozone members economies set to contract. However, EEF expects Eurozone GDP to grow by about 1 percent in 2013 before picking up to 2 percent a year in 2015-16.

The main constraints to Eurozone growth this year will stem from fiscal consolidation, which EEF estimates will amount to more than 1 percent of GDP, and tight credit. Despite the introduction of the long-term refinancing operations (LTRO), which has boosted financial markets and ensured that the prospect of a banking credit crisis has receded, latest data indicates that much of the liquidity provided has not yet been lent on into the wider economy.

In response to tighter financing conditions, an increase in spare capacity and weaker domestic demand, businesses are likely to scale back investment spending. Spanish and Italian firms are forecast to cut capital spending by 5 percent or more in 2012, while in France and Benelux investment will remain flat or edge down slightly. Amongst the larger economies, only in Germany is investment spending likely to grow meaningfully but not until the second half of the year.

Despite a moderation in inflation this year (assuming no further rise in oil prices), consumer spending is also likely to be reduced reflecting an uncertain external outlook and deepening fiscal austerity although perhaps by less than might be expected. At the Eurozone level, EEF predicts that growth in consumer spending is likely to be negative at -0.7 percent. This outlook for business investment and consumer spending means job creation is set to weaken in most Eurozone economies. With Germany again set to be one of the few exceptions, EEF forecasts unemployment rates to rise across the Eurozone in 2012 peaking at 18.2 million at the turn of the year, although given the relatively strong balance sheets of many European corporates this trend could be quickly reversed if confidence begins to return.

The ECB will continue to play a critical role in 2012 by providing extensive support to the Eurozone economy. Should the economic environment deteriorate, EEF believe this should include lowering interest rates further to 0.5 percent and stepping up purchases of government bonds to facilitate debt refinancing by peripheral countries at affordable interest rates. Without action, there is a risk of a series of disorderly defaults among weaker countries that could threaten the future of the Eurozone.