Berlin  - The German Government revised up its growth forecasts Friday amid signs that Europe's biggest economy is recovering faster than expected from its steepest downturn in more than 60 years.

After contracting by 5 per cent this year, Berlin expects the German economy to grow by a moderate 1.2 per cent in 2010 with a recovery gaining ground in the run-up to the end of 2009 after the nation climbed out of recession in the second quarter.

Berlin had previously projected a more dramatic 6-per-cent slump this year and a meagre 0.5 per cent growth rate in 2010.

"The chances are good that the upswing can strengthen next year," said German Economics and Technology Minister Karl-Theodor zu Guttenberg with exports helping to power the nation's economic rebound.

The improved economic outlook for Germany comes as Chancellor Angela Merkel's Christian Democrat-led (CDU) conservative political bloc and the business friendly Free Democrats (FDP) attempt to reach agreement on tax cuts, which is a crucial issue in their negotiations to form a new coalition government.

In particular, Germany's brighter economic outlook will give Merkel and the FDP more room to move in meeting promises made as part of month's election for tax relief.

After tumbling by 14.6 per cent this year on the back of a sharp contraction in global trade, Germany, which is also the world's leading export nation, will report a 4.3-per-cent rise exports in 2010, Berlin said.

This means that Germany's export machine will take over from private consumption next year as the major driver of economic growth.

Following a 0.8-per-cent growth rate in 2009, German household spending will slump by 0.3 per cent next year.

Releasing its report, the government warned in its report that overhanging the nation's economic outlook was the threat of growing jobless queues across the nation.

Analysts say rising unemployment risks dampening private consumption and undercutting the nation's economic growth rate, as a result possibly slowing the pace of recovery in the nation.

Germany's labour market has consistently turned in a better performance this year than predicted, despite the global economic crisis and the big contraction in economic growth.

But Berlin expects the numbers out of work to rise by about 640,000 next year as the recession slowly catches up with the labour market and government-subsidized short-term job contracts are wound back.

As a result, unemployment will breach the key 4 million mark next year to average about 4.1 million in 2010, Berlin predicts.

Unemployment should average 3.5 million this year, after rising 190,000, the government said.

The forecast rise in unemployment combined with the modest economic growth outlook means inflationary pressures in Germany are likely to remain weak.

Annual consumer prices will average minus 0.3 per cent in 2009, edging up to 0.9 per cent in 2010, the government forecasts.(dpa)