A growing number of economists believe the German economy could rebound from its deepest post-war recession to achieve growth rates of three percent or more next year if foreign demand continues to pick up and the labor market holds firm.

A rapid return to growth may mean the incoming government will face less of a budgetary headache, creating scope to deliver on election promises like tax cuts, bolstering incentives for child-raising and investment in green technology.

German Chancellor Angela Merkel is vying for a second term in a Sept. 27 election which polls show could produce a center-right alliance of her conservatives and the business-friendly Free Democrats (FDP).

“I don't think the politicians are going to be able to believe their luck,” said Adolf Rosenstock, an analyst at Gebser & Partner Asset Management in Frankfurt, who predicts the German economy will grow by 3.1 percent in 2010.

The government has forecast 2010 growth of just 0.5 percent.

Battered by a collapse in exports, Germany slumped to a record contraction in gross domestic product (GDP) of 3.5 percent in the first quarter of 2009.

That sowed fears the next government would enter 2010 saddled with record debts and spiralling unemployment, tying its hands as consumers battened down the hatches over job worries.

But figures this month showed the economy exited recession in the second quarter. This, combined with rising business sentiment, perkier exports and a surprisingly resilient jobs market are leading forecasters to reassess.

“The German bounce back is going to lead the way for Europe in our view,” said Greg Fuzesi, an economist at JP Morgan, which is now predicting German growth of 3.6 percent next year, the strongest rate since 1991.

Not everyone is so optimistic.

Gustav Adolf Horn, director of the IMK economic research institute, said Germany's success in stemming job losses by subsidizing shortened working hours could not last.

He believes a new government will have to consider a third economic stimulus package if firms fire more workers after the vote, hitting consumer spending.

“The first task of the new government will be to overcome this crisis. It's not been dealt with yet,” he told Reuters. “We've reached the bottom of the downturn in industrial output. But we've not reached the bottom for the job market.”

Berlin has introduced two growth programs worth an estimated 81 billion euros, helping the economy stabilize but also pushing German debt and deficit levels sharply higher.

Federal new borrowing is expected to hit a record 86 billion euros in 2010 and the public sector budget deficit could reach six percent of GDP next year — double European Union limits.

Regardless of whether Merkel ends up with the center-right coalition of her choice or Germany gets what polls suggest is the other most likely outcome, another “grand coalition” with the Social Democrats (SPD), a key task of the next government will be to tackle this budget hole.

The strong rebound forecast by some economists could gird the economy against big job losses, cut the borrowing need and help Berlin rein in the deficit faster.

Economists at Allianz now believe GDP could shrink by as little as 4.1 percent in 2009. The government has budgeted for a 6 percent fall.

That could open the door to tax cuts favored by Merkel's conservatives and the FDP. While the parties differ on how substantial any relief should be, both see scope for an easing of income, corporate and inheritance tax.

“If upbeat forecasts are right and Merkel gets a coalition with the FDP, they'll look to press ahead with tax cuts,” said Gero Neugebauer of Berlin's Free University.

Tax relief could help strengthen domestic demand, but the key growth driver in any recovery is likely to come from abroad.

Volker Treier, chief economist of the German chamber of industry and commerce (DIHK), says key trading partners in Europe and beyond are showing resilience. In June, German exports posted their biggest monthly rise in nearly three years.

“Looking at Asia, there are signs of a pick-up. Even in the United States, the picture is brightening,” Trier said.

Risks to the outlook remain, notably Germany's fragile banks. The government fears they could rein in lending to consumers and small-to-medium sized companies next year and is already thinking about steps to counter that.

If the optimists are right, however, the next government may find that the measures already introduced to get the economy going are sufficient, said Rosenstock at Gebser & Partner.

“Merkel won't need to do anything but keep calm,” he said. “Her main task will be to hold a steady course and avoid doing anything stupid. I have the impression she's understood that.”