The European Commission on Tuesday predicted that the EU and eurozone will grow in 2010 at a modest rate of 0.7 per cent. In May, it forecast that the economies would likely shrink 0.1 per cent in 2010.

The European Commission said a "better-than-expected" rebound in the second half of 2009 would likely be followed by slower growth early next year.

The EU said eurozone likely exited recession in the third quarter of 2009, it said, after five consecutive quarters of negative growth. The first official third quarter figures will be published on November 3.

It warned that the upturn is "largely driven by temporary factors" as companies restock after a spending freeze and governments spend billions of euros on economy stimulus programs to stoke growth.

The EU did not change its estimate for the economy of the 16 nations that use the euro to contract by 4 per cent this year. It downgraded the figure for the economy of the entire 27-nation European Union to shrink by 4.1 per cent in 2009, from an earlier estimate of 4 per cent.

High unemployment and financial deleveraging — as companies pay off large debt loads — will likely dampen growth in the longer-term, it said, as households and businesses have less disposable cash.

The EU was less pessimistic in this forecast about how high the jobless rate would rise. It earlier forecast the eurozone rate rising to a postwar record of 11.5 per cent in 2010 but now sees the rate rising from 9.5 per cent this year to 10.7 per cent next year.

Inflation will also remain low for the next two years, it said, staying well below the European Central Bank guideline of just under 2 per cent. This may sap the case for raising rates from an all-time low of 1 percent in the eurozone.