The German growth forecast for 2010 was revised up to 3% by the Deutsche Bundesbank on Thursday, following last week's report of impressive GDP (gross domestic product) growth of an annualised rate of almost 9%, in the second quarter.

In its monthly report for August, the Bundesbank raised its forecast from a previous prediction of 1.9%. The central bank said that it expects the German economy to slow in the remainder 2010 but added that the expansion in 2010 may well be the strongest since 2006. In 2009, Germany's economy contracted by 4.7%, the worst recession since World War II.

"More than half the decline in production triggered by the crisis has been made good," the Bundesbank said. "Favourable conditions abroad and domestic factors both helped."

Exports accounted for 41% of German GDP in 2009, compared with 13% in Japan and 11% in the US. 

Foreign sales are forecast to grow 8% in 2011 after expanding 11% this year, the DIHK camber of commerce and industry, which represents 3.6m companies, said last week. The trade surplus is expected to widen, to €160bn from €159bn  in 2010.

“The economic recovery in the US is proceeding somewhat more slowly than forecast some months ago,” DIHK said. “In the other industrialised countries, especially in Europe, the recovery is also restrained.”

While German growth in the second quarter, increased demand from other Eurozone countries, there is still pressure for action to increase domestic demand.

Last week, Jean-Claude Juncker, Luxembourg’s prime minister and chairman of the Eurogroup of finance ministers, attacked German economic policy, according to the Luxemburger Wort. Germany’s success was based on “wage and social dumping,” Juncker is reported as having said. “The way Germany went about improving its competitiveness, I would not like to see in our country.” Since the launch of the euro in 1999, German workers had seen a meagre 12% rise in wages, whereas his countrymen saw a 41% rise, he said.

It's a bit like the kettle calling the pot black arse!

Luxembourg has favourable terms for financial services firms and its VAT rate of 15% has resulted in international operations such as Skype locating there.

Germany is facing the issue of an ageing population and its pension numbers rose to 17.5m in 2009, while duration of payments time doubled from 1960. This reduces the chance the government will impose income-tax cuts to encourage spending.

"We were successful in building one of the most competitive economies in the world, why should we ruin that by pumping up wages now?" said Thomas Mayer, chief economist at Deutsche Bank. "That would increase unemployment. And we shouldn't punish our exporters, that's idiotic, they're our crown jewels."