BRUSSELS (AFP) - The European Union upgraded its economic forecasts on Tuesday, betting that a modest recovery is now sustainable as member states push ahead with reforms.

The 18-nation eurozone should grow 1.2 per cent this year and 1.8 per cent in 2015, slightly up from previous estimates given in November for 1.1 per cent and 1.7 per cent, the European Commission said.

Similarly, the full 28-member EU will expand 1.5 per cent this year and 2.0 per cent in 2015, also both revised up by 0.1 percentage point.

"Recovery is gaining ground in Europe.... Rebalancing of the European economy has been progressing and external competitiveness is improving," EU Economic Affairs Commissioner Olli Rehn said.

"The worst of the crisis may now be behind us, but this is not an invitation to be complacent as the recovery is still modest," Mr Rehn said.

"To make the recovery stronger and create more jobs, we need to stay the course of economic reform."

The eurozone escaped a record 18-month recession in second quarter 2013 and after "three consecutive quarters of subdued recovery, the outlook is for a moderate step-up in economic growth," the Commission said in its Winter forecasts report.

Among member states, European powerhouse Germany should post growth of 1.8 per cent this year, rising to 2.0 per cent in 2015, slightly better than November's estimates, while struggling France will pick up slightly to 1.0 per cent but is flat at 1.7 per cent for next year.

Twice-bailed out Greece is expected to escape six years in deep recession with growth of 0.6 per cent and then 2.9 per cent while Italy will expand 0.6 per cent and 1.2 per cent as Spain does better with 1.0 per cent and 1.7 per cent.

Non-euro Britain, however, easily out-distances its eurozone peers with gains of 2.5 per cent and 2.4 per cent this year and next.

For comparison. the US economy is expected to grow 2.9 per cent this year and 3.2 per cent in 2015.

REFORMS MUST CONTINUE

The Commission stressed that growth depends on continued commitment to economic reforms and sound fiscal policy.

The "largest downside risk... is a renewed loss of confidence that could stem from a stalling of reforms at national or European level," the Commission said.

Noting very low inflation, the Commission conceded it could "entail risks to the rebalancing of the economy" but believed there was "only a marginal probability of shocks large enough to de-anchor inflation expectations and initiate EU-wide deflation".

Inflation has been falling steadily in recent months - it hit 0.8 per cent in January, way below the European Central Bank's 2.0 per cent target - reflecting very weak consumer demand and sparking concerns of deflation, when prices fall in real terms.

In deflation, consumers put off purchases to a later date when they expect them to be cheaper but this leads companies to cut investment, hitting salaries and jobs, and in turn, undercuts demand further.

The Commission said offsetting this risk, the recovery could be stronger than expected, especially if "further bold structural reforms are implemented".

On this basis, the Commission estimated 2014 eurozone inflation at 1.0 per cent, rising to 1.3 per cent in 2015 and compared with its previous estimates for 1.5 per cent and 1.4 per cent.

For unemployment, currently running at near record highs around 12 per cent, it saw no change this year at 12 percent and an improvement next year to 11.7 per cent, better than November's figures.

Member state finances which have suffered huge strain during the debt crisis show signs of stabilising, the Commission said, but much remains to be done.

The average eurozone public deficit - the shortfall between government revenues and spending - is expected at 2.6 per cent of Gross Domestic Product this year and to improve to 2.5 per cent in 2015, well below the EU 3.0 per cent limit.

But that is still slightly worse that the previous estimates of 2.5 per cent and 2.4 per cent.

Total accumulated debt is expected to show little improvement at 95.9 per cent and 95.4 per cent this year and next, still way over the 60 per cent limit.

While Germany again leads the field with a zero public deficit forecast for the two years, France falls badly short of targets agreed with the Commission to stabilise its finances at the 3.0 per cent ceiling, coming in at 4.0 per cent and 3.9 per cent.

Spain's deficit this year should improve to 5.8 per cent from 7.2 per cent for 2013 but then slips back again to 6.5 per cent next year, the Commission said.

Greece, however, which is locked in difficult talks with its international creditors over its reform commitments and future funding needs, should return to positive territory at 1.0 per cent in 2015, after a deficit of 2.2 per cent this year and 13.1 per cent in 2013.