"The projection for 2013 has been revised marginally downwards; for 2014 there has been a marginal upward revision," European Central Bank President Mario Draghi said in his monthly news conference on Thursday.
The June Eurosystem staff macroeconomic projections forecast a decline of 0.6% in real gross domestic product for the eurozone this year and an expansion of 1.1% for next year.
The downside risks highlighted by the ECB include "the possibility of weaker than expected domestic and global demand and slow or insufficient implementation of structural reforms in euro area countries," Draghi said.
He noted that "recent developments in economic sentiment survey data has shown some improvement from low levels" and said exports from the eurozone should be supported by an improvement in global demand while domestic demand should also gradually increase.
"The significant improvements in financial market conditions since last summer should work their way in the real economy, as should the financial adjustment," he said.
At the same time he warned eurozone governments to continue structural reforms and efforts to reduce their budget deficits and debt.
"Don't get too optimistic about the current market conditions. That is my message," Draghi said.
The recovery is going to be gradual, driven mainly by exports – which "increased in almost all countries," especially in Germany, Spain and Italy – and by the ECB's easy monetary policy "which gradually will find its way into the real economy."
Besides, the low inflation is increasing the purchasing power of the people and the lower price of oil "is also a factor that will work in this direction," he said.
"Finally you have a wealth effect coming from financial markets."
But he added: "against this you have quite broad weakness in domestic demand and consumption, due to high unemployment."
The inflation forecast for this year was slightly lowered, to 1.4%, reflecting mainly the decline in oil prices; the projection for next year remained unchanged at 1.3%.
The central bank maintained its key interest rate flat at 0.5%.
On monetary policy, Draghi reiterated that the ECB was "technically ready" for negative interest rates on deposits and said that, over the longer term, the bank will look at the possibility of accepting asset-backed securities as collateral.
Recent data confirmed that monetary and credit expansion had remained weak but there was some progress such as strengthening the domestic deposit base in countries affected by the crisis and a reduction in the reliance on the Eurosystem for funding, he said.
The repayments of the ECB's Long-Term Refinancing Operations (LTRO) have reached nearly 60% of the net injection of liquidity that took place in the early months of last year, Draghi noted.
"It is essential that the fragmentation of euro area credit markets continues to decline further," he said. "It is essential that euro area government do not unravel their efforts to reduce budget deficits."
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