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Europe’s recovery drive may be stuck in the 'slow lane'

Fiat plant in Melfi, Italy
Alessia Pierdomenico | Getty Images
Fiat plant in Melfi, Italy

A sturdy recovery is still a distant prospect for Europe, despite recent upbeat economic data, ratings agency Standard & Poor's (S&P) said on Wednesday.

S&P forecast that the euro zone economy would shrink once again this year, by 0.7 percent, before growing by 0.8 percent in 2014 and 1.3 percent in 2015. Its outlook contrasts with a number of more bullish forecasts for the region, with Goldman Sachs, for example, expecting a smaller contraction of 0.36 percent in 2013, and growth of 0.87 percent next year.

"We see that some of the actors that usually stage a recovery are not yet in place, such as exports, consumer spending, and corporate investment, except to a certain extent in Germany," said S&P EMEA Chief Economist Jean-Michel Six, in a report entitled "Europe is moving from sub-zero to sub-par growth."

(Read more: Why investors should not worry about Germany)

"Looser fiscal policies appear to be playing a more active role in the current stabilization in Europe. But this also suggests that a sturdy recovery is a long way off," he added.

A run of positive economic data over the past two months have boosted hopes of a looming upturn in the region. In particular, the official estimate for second-quarter gross domestic product (GDP) growth suggested the single currency zone's six-quarter-long recession had ended, coming in at 0.3 percent.

Earlier this week, a survey by Sentix research group showed that euro zone sentiment had turned positive for the first time in more than two years in September, and PMI (Purchasing Managers' Index) data for August revealed that business activity expanded for a second successive month.

Things are even looking up for the likes of Greece following a "tourism bonanza" this summer, according to Capital Economics. UBS upgraded their growth forecasts for the country after a "better-than-feared" economic contraction in the second quarter.

(Read more: 'Tourism bonanza' to give Greece a boost?)

However, unemployment remains stubbornly high in many countries, with euro zone joblessness averaging 12.1 percent in July. The rate was almost twice as high among under-25s, at 24 percent.

"Continued weak growth in the next two years is likely to yield incremental rises in unemployment in most countries through the better part of 2014, before stabilizing in 2015," warned Six.

S&P's bearish views gelled with those of European Central Bank President Mario Draghi, who said on Monday that the euro zone's revival was still in its "infancy" and remained "fragile". In his annual speech this month, European Commission President José Manuel Barroso also described the recovery as "fragile".

(Read more: Almost 1 in 3 Europeans could be poor by 2025)

Six said exports, consumer spending, and corporate investment would not start improving until next year.

"We believe that it will take a while before these economic drivers start playing their parts again. According to our forecast, that won't happen in a meaningful way before the second quarter of 2014, amid still elevated private debt, tight credit conditions, and slower growth in foreign (especially emerging) markets," he said.

—By CNBC's Katy Barnato

Contact Europe: Economy

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