Germany's Kiel institute for the World Economy, or IfW, raised its growth forecast for the country citing the stronger-than-expected upturn in the second quarter and a booming exports sector.

The institute now expects the economy to grow 3.4% this year, notably faster than the 2.1% growth predicted in June. Similarly, it has raised the forecast for next year to 1.7% from 1.2%.

However, the think-tank predicts that though the economy will continue to grow in the third quarter, the expansion will lose its momentum. "Despite the surprisingly good performance of the German economy in the last months there is still a significant production gap of 3% compared to the pre-crisis maximum," IfW observed.

In 2011, exports will no longer be the driving factor as growth in imports will outpace export growth, the group said. Therefore, growth will be driven by domestic demand.

However, substantial risks remain as the financial markets are far from restabilization, IfW said. Also, there is little room for even more expansionary monetary policy interventions and fiscal policy makers face high and still strongly increasing public debt in many countries that might give rise to new waves of confidence crises.

Germany's economy expanded 2.2% sequentially in the second quarter. It was the highest increase of economic activity ever recorded in the post reunification period.

The global economy would grow 4.7% this year and at a slower 3.6% during next year. The world economic outlook has deteriorated during the summer, but a "double-dip recession scenario is unlikely" for the global economy as a whole as well as for the large economic areas individually, the report said.

The European Central Bank as well as central banks in all major currency areas are expected to retain the policy rates till the fourth quarter of 2011 with the economic recovery losing momentum, IfW added.