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Euro zone to see 'self-sustaining recovery' in 2016: EY

Rising exports, investment and consumption: 2016 looks bright for the euro zone as a "more self-sustaining" recovery takes hold in the region, according to the latest forecasts from EY.

"Heading into 2016, the euro zone recovery is becoming broader-based and more self-sustaining," EY said in its look-ahead published Thursday.

"After initially being led by consumer spending in 2014-15, conditions are now right for the rebound in capital investment that should underpin a steady (if unspectacular) recovery into the medium term. We expect gross domestic product (GDP) growth of 1.5 percent in 2015, before it picks up to 1.8 percent in 2016 and 2017," the report, published in collaboration with Oxford Economics, noted.


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EY, formerly known as Ernst & Young, perceived several positive factors at work in the 19-country single currency area, a region that has struggled to recover from the global financial crash and its own subsequent sovereign debt crisis.

EY said that "growing exports and rebounding domestic demand mean that capacity constraints are emerging in a number of sectors" and also predicted a boost to loan demand and capital investment, which should "grow by around 2.5 percent a year." It also predicted that consumption would "remain robust" with consumer spending to grow 1.6 percent in 2016 although it said "the temporary boost from lower energy prices will fade."

Governments in the euro zone -- particularly the recipients of financial bailouts such as Portugal, Spain, Ireland and Greece -- have pursued programs of deep austerity measures and spending cuts in order to cut their deficits and debt piles. There have been calls for governments to start to increase spending, however, in order to boost lackluster growth. EY believed that 2016 could see investment start to grow and then accelerate.

"With emergency austerity measures now largely in the past, governments should start to ease their capital budgets. After falling for six straight years up to 2015, we expect public investment to grow by 0.4 percent in 2016 and then gather pace to 3.2 percent by 2018, before easing gradually thereafter. More generally, current government spending will continue to recover, albeit to a pace well short of the pre-crisis era," EY said.

Despite the gradual recovery in the euro zone, the region faces headwinds from a general global slowdown particularly on the back of slowing growth in China and other emerging markets.

EY noted that while the euro zone export economy had been boosted in recent years by the weaker euro – as a result of the European Central Bank's quantitative easing program, which has just been extended amid a very low inflation environment – the medium-term outlook for export growth was not all rosy.

"The slowdown in emerging markets will have an impact upon export prospects," EY warned.

"Despite a more favorable exchange rate – aided by an extension of asset purchases by the ECB, as the path for price growth remains worryingly weak – and recovery in advanced economies, we forecast that export growth will ease from 4.5 percent in 2015 to 3.7 percent in 2016 and 3.4 percent a year into the medium term."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow CNBC International on Twitter and Facebook.