The debt-laden eurozone economy will grow by 1.6 per cent in 2011, but predicted average inflation is set to accelerate to 2.6 per cent, the European Union’s data agency said yesterday.

And days from key talks on a second bailout for Greece, new Eurostat forecasts showed the Greek economy shrinking by a worse-than-expected 3.5 per cent in 2011, with the government’s annual deficit also shooting back up to 9.5 per cent.

The eurozone figures for growth are unchanged from the European Commission’s most recent estimate at the beginning of March, but predicted average inflation this year is shooting up from 2.2 per cent on the last estimate, to 2.6 per cent – hitting three per cent across the full 27-state European Union.

“A rather sharp upward move since the autumn,” EU economic affairs commissioner Olli Rehn conceded to reporters.

“Economic recovery in Europe is solid and continues, despite recent external turbulence and tensions in the sovereign debt market,” said Mr Rehn, the top figure for the bloc in bailout negotiations.

“Public deficits are clearly declining,” he said, with the overall eurozone figure predicted to fall to 4.3 per cent in 2011, from 4.6 per cent forecast last November.

The EU deficit ceiling is supposed to be three per cent, but only five of the 17 eurozone states are expected to beat or meet that target this year.

In order to strengthen these trends, Mr Rehn said governments need “continued fiscal consolidation and determined implementation of structural reforms that help job creation and improve the competitiveness of our economies.” The Eurostat data, released three days before eurozone finance ministers meet in Brussels to discuss a second bailout for the government in Athens, showed a sharp increase from the last Greek forecast of three per cent growth and a 7.4 per cent deficit, at least for the coming 10 months.

Greece actually recorded 0.8 per cent growth in the first quarter of this year, and is now tipped to post 1.1 per cent growth in 2012. But the national statistics agency in Athens nevertheless underlined that GDP in the first quarter of 2011 “contracted by 4.8 per cent from the first quarter of 2010”.

However, with markets charging high rates to lend to Athens, and Greek banks potentially facing huge exposure to possible government debt restructuring, many analysts doubt Greece can support its debt burden without further help. In terms of growth, Germany, with the biggest European economy, led the way, expanding by a quarterly 1.5 per cent to a level last seen before the economic crisis in 2008, the provisional data showed.

France added one per cent, the strongest rate since the second quarter of 2006, and Spain, a country said to hold the key to the eurozone debt crisis, turned in a gain of 0.3 per cent as it picked up speed from the end of last year.

But in Italy, the economy grew by just 0.1 per cent in the first quarter, less than economists had forecast. The outcome was the same as in the last quarter of last year.

The International Monetary Fund said on Thursday that core eurozone economies would benefit from sustained economic activity this year, with trading partners in eastern Europe set for even stronger growth.

Economic factors include rising inflation and interest rates fuelled in large part by higher prices for oil and other commodities, and unrest in North Africa and the Middle East.

Europe’s fragile banking sector could present another impediment to growth, as commercial banks still need to establish adequate capital buffers to guard against potential losses on eurozone government bonds and risky real-estate investments.