The European Union economy is recovering from the deepest and longest recession in its history, but growth is still fragile although risks in 2010 are broadly balanced, the European Commission said on Thursday.

The EU executive kept unchanged its 2010 growth and inflation forecasts for the 16 countries using the euro and the whole 27-nation bloc for this year from early November 2009 and said risks to the projections were broadly balanced.

It said both the euro zone and the EU would expand by 0.7 percent this year after contractions of 4.0 percent and 4.1 percent respectively in 2009.

With many of the main driving forces being still temporary in the EU and globally, the robustness of the recovery is yet to be tested, it said in a statement.

The Commission said in its interim forecasts for 2010 that while better-than-expected global demand could further spur exports, investment remained very weak, reflecting exceptionally low capacity utilization.

A muted outlook for investment typically implies a weak labor market ahead, which in turn is likely to dampen private consumption, the Commission said.

It said euro zone inflation, which the European Central Bank wants to keep just below 2 percent over the medium term, would be 1.1 percent in 2010. In the whole EU, inflation should be 1.4 percent, above the 1.3 percent forecast in November.

A sizeable slack in the economy is set to keep inflation in check, offsetting increases in energy and commodity prices. Price stability is expected to be maintained, the Commission said.

Risks for the inflation outlook were broadly balanced, as for the growth outlook.

On the downside, the situation of financial markets remains highly uncertain and subject to serious adverse risks, the Commission said.

On the upside, the vigor of the global recovery, particularly in Asian emerging markets, and the imminent turning of the inventory cycle in the EU may have a greater impact on domestic demand than currently anticipated, it said.

(Reporting by Jan Strupczewski, editing by Dale Hudson)

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