The International Monetary Fund (IMF) said the eurozone economy will not begin to expand until 2013 at the earliest and warns that the sovereign debt crisis may again spark another turn to recession.
The global lender raised its forecast for Europe as part of its regular World Economic Outlook, in which it also said global growth was improving but remained "very fragile".
"With the passing of the crisis and some good news about the US economy, some optimism has returned. It should remain tempered," said Oliver Blanchard, the IMF's chief economist.
"Even absent another European crisis, most advanced economies still face major brakes on growth. And the risk of another crisis is still very much present and could well affect both advanced and emerging economies."
The IMF said it expects eurozone gross domestic product (GDP) to advance by around 0.9 percent in 2013 after a slight contraction of 0.3 percent this year. The figures are slight improvements from the fund's January estimate. Its forecast for global GDP growth for this year was lifted to 3.5 percent from a 3.3 percent estimate in January while its assumption for 2013 was also raised to 4.1 percent from 3.9 percent.
The fund warned on the fast-rising price of oil and the impact it could have on growth prospects and cautioned the world's major central banks to stand ready to ease monetary conditions (and for governments to be mindful of too-fast, too-debt deficit reduction plans) as the fragile recovery attempts to gain traction.
Chief among its concerns, however, remain the possibility of a replay of the sovereign debt crisis in Europe that necessitated IMF-involved bailouts in Greece, Ireland and Portugal.
"Despite the progress in strengthening crisis management in recent months, a renewed escalation of the euro crisis remains a possibility as long as the underlying issues are not resolved," the fund said. "The ECB should lower its policy rate while continuing to use unconventional policies to address banks' funding and liquidity problems."
The fund said it expected Spain to remain in a recession for at least another year and will only grow by 0.1 percent in 2013.
Other key figures from the World Economic Outlook include a slight nudge ahead in expectations for the US economy (2.1 percent growth predicted, up from 1.8 percent in January) and no change in the fund's prediction of an 8.1 percent GDP expansion in China. Overall, the IMF expected emerging market economies to grow at a 5.7 percent clip this year, up from the previous forecast of 5.4 percent and continue to accelerate next year (6 percent growth, revised up from January's 5.9 percent estimate).
Advanced economies, including G-7 members Canada, the UK and Japan, will grow by 1.4 percent this year and 2 percent next year, the fund predicted. Both figures are marginally higher than their January estimate.