The economy will contract by four to five percent in 2009, compared to a previous dire prediction of six percent, the spokesman said.

However, despite the more bullish outlook for Germany, even a contraction of four percent would be the most painful slump since World War II.

The global crisis slammed demand for goods made in Germany, the world’s second-largest exporter, but recent signs have given rise to renewed optimism that the economy could bounce back.

The GfK consumer confidence index has risen for five consecutive months and the closely-watched Ifo business confidence indicator reached its highest level for a year in September.

Unemployment has not risen sharply as economists feared, in the wake of the crisis, even falling in September to 8.0 percent, although experts expect jobless lines to lengthen considerably in the coming months.

And in August, the country formally emerged from recession by registering output growth of 0.3 percent in the second three months of the year. Economists define a recession as two or more consecutive quarters of economic contraction.

Nevertheless, senior figures in the German economy including Merkel and Bundesbank President Axel Weber have warned that the path to recovery will be bumpy. Weber said recently that Germany would not return to 2008 levels of prosperity until 2013.

Merkel and her new coalition partners, the pro-business Free Democrats, are currently working on a plan to haul Germany out of its slump following their election victory on September 27.

Despite gaping holes in the public purse, the new government is likely to slash taxes in a bid to boost consumption and simplify the complex tax system. The next official government growth forecast is set to be unveiled on October 21.