The eurozone’s health has yet to worsen over the next six months with output expected to contract by 0.6 per cent before it begins to make an “anaemic recovery” next year through estimated growth of 0.4, the summer Ernst and Young Eurozone Forecast warns.

Alarming unemployment continues to weigh on economic activity

Authorities’ loosened grip on purse strings and momentum picking up across the global economy should help the eurozone to growth of 1.7 per cent in 2014, and of two per cent in 2015 and 2016.

The forecast acknowledges that there are numerous risks in waiting along the path to some respite, not least those involving political will. But with the ongoing austerity programme in Greece, and Spain and Italy’s financial woes under some control, the forecast suggests risk aversion will begin to lift towards the end of the year.

The disparity between the eurozone’s north and south poles has widened however, and growth will be inconsistent. Some countries will avoid recession this year and head for some growth in 2013, but there will be no growth for the periphery countries before 2014.

Ernst and Young warns that high youth unemployment in the peripheries has reached levels that could threaten social stability.

This year’s forecast continues to assume that Greece will remain a member of the euro family, although the anti-austerity parties winning a sizable vote in the recent elections has ensured that euro exit fears linger on.

The European Central Bank’s second long-term refinancing operation helped avert an immediate credit crunch. Credit standards demanded of borrowers steadied, and banks’ liquidity and access to finance improved. That did little to encourage corporate and consumer appetite for lending however, as demand for loans fell significantly at the beginning of the second quarter of the year.

Alarming unemployment continues to weigh on economic activity – one in four people are out of work in Spain, while 22 per cent and 15 per cent are jobless in Greece and Portugal, an increase of three to four per cent in each market in the past six months alone. Even here, the disparity between the poles is stark – unemployment in Germany, Austria and the Netherlands remains below six per cent.

Uncertain futures, job scarcity and low wage growth continue to batter consumer confidence in the eurozone – Germany excluded.

Ernst and Young predicts real consumer spending will grow by 0.9 per cent in Germany this year, by just 0.2 per cent in France, and fall or stagnate across the rest of the single currency area.

Consumer spending is, however, expected to rise to one per cent in the core next year, but the periphery will fall further in 2013.

Governments have faced a dilemma over recent months – how to deliver faster growth in austere times.

“For some the debate between austerity and growth is a straight choice, but this is a dangerous simplification,” the forecast’s senior economic advisor Marie Diron said.

“Given the exposure of banks around the eurozone to sovereign debt, fiscal stability and the stability of the financial system are more deeply interconnected than ever.

“Fiscal stability is a key part of a return to health in the banking sector, and the provision of finance for investment and growth.”

Ernst and Young believes fiscal policy can be adjusted to be growth-friendly – government spending can be altered at the national level to spur growth from current to capital expenditure.

The more fiscally sound in the eurozone could ease their consolidation plans to boost domestic demand, spurring activity in other sectors.

Italy, Spain and others would do well to factor in broadening trade with rapid-growth markets – as Germany is doing with capital goods exports to China and other countries – into their economic recovery strategies. To secure competitiveness in the periphery, Germany may need to accept higher wage and price inflation domestically. Some policy makers are beginning to warm to the idea, according to the forecast. But how long they will favour it for is another matter.