In its annual economic report published Wednesday, the German government raised its 2007 growth forecast to 1.7 percent in 2007, instead of the previously forecast 1.4 percent. In 2006, the German economy notched up growth of 2.5 percent, its fastest rate of growth since the boom of 2000.

And the annual average jobless rate would fall to 9.6 percent this year from 10.8 percent in 2006, the government predicted.

"With a bit of luck"

Indeed, "with a bit of luck", the annual average jobless total could fall below the key four-million mark, Economy Minister Michael Glos told a news conference in Berlin on Wednesday.

In 2006, the annual average jobless total stood at 4.487 million. The last time unemployment in Germany was less than four million was in 2001.

"The economic engine is running smoothly," Glos said. And he expressed confidence that any negative economic effects from the sharp rise in value-added or sales tax (VAT) that came into on January 1 would be short-lived.

"The VAT effect will be overcome within a few months and household consumption will pick up again," Glos said.

The government raised VAT from 16 percent to 19 percent at the beginning of the year in a move which critics claimed would drag on consumer spending and on economic activity as a whole.

Glos: reforms made it possible

Glos said it was "particularly pleasing that, in addition to the impulses coming from foreign trade, the domestic economy is contributing increasingly to growth."

He added: "The economy is standing on two legs and is more robust to the global economic challenges facing us."

The government's recent labor market and social welfare reforms had helped enhance Germany's economic performance, Glos said. "The deep and far-reaching reforms have given investors and consumers confidence for the future and set free economic forces," he asserted.

Nevertheless, the government must not rest on its laurels and think the current upturn can solve the country's remaining economic problems, Glos continued.

"Further structural reforms are indispensable," he concluded.

The economics minister's confidence is based on the hope that an increase in domestic demand will be added to Germany's already brilliant export balance.

Opposition remains wary

Glos also pointed out that it wasn't just the government's reforms that were responsible for the upswing.

"There have been many players who've made this upswing possible, among them employers and employees with their moderate wage bargaining deals," he said. "They've added to Germany's increased competitiveness on the global market."

However opposition leaders have urged the grand coalition of Christian and Social Democrats not to rest on their laurels and push on with the reform course.

They criticize that the general economic upswing has not yet resulted in an improvement of the situation for the long-term unemployed. It seems to be as hard for them to get a proper job now as it was before Merkel's government took office.

Turning to the state of Germany's public finances, which improved sharply in 2006, Glos said that the government would press ahead with budget consolidation.

Under EU rules, eurozone countries are not allowed to run up public deficits in excess of 3.0 percent of GDP, a limit that Germany had exceeded every year since 2002. But the German deficit ratio fell back within EU limits in 2006 owing to increased tax revenues from the booming economy and lower unemployment payouts.

Flow of good news

The government's confidence is backed up by the seemingly never-ending flow of positive economic data recently.

On Wednesday, the latest monthly unemployment data showed that the downward trend is still intact, despite an upward blip in the jobless total in January.

Retail sales rebounded in December, separate data showed, and inflation picked up only marginally, with the VAT hike having a much more limited effect than feared.

The Federal Labor Agency in Nuremberg calculated that the jobless total rose by 240,000 to 4.247 million in raw or unadjusted terms in January, pushing the jobless rate -- which measures the total number of people out of work against the working population as a whole -- up to 10.2 percent from 9.6 percent from December.

Nevertheless, the increase was not as steep as is usual at this time of year, when the jobless numbers are traditionally boosted by the bad weather and the end of seasonal Christmas contracts.

After taking such factors into account, unemployment continued to decline this month. The Bundesbank calculated that the seasonally-adjusted number of jobless declined by 106,000 to 3.976 million in January, cutting the adjusted jobless rate to 9.5 percent from 9.8 percent.