Sept. 9 (Bloomberg) -- Germany’s Kiel Institute for World Economics said Europe’s largest economy will shrink less this year than it forecast in June after gross domestic product returned to growth in the second quarter.

The German economy will shrink 4.9 percent this year, the institute said today, raising its prior forecast of a 6 percent contraction. Next year GDP will expand 1 percent, the IfW said, raising its outlook of 0.4 percent growth.

“Signs point to a noticeable increase in real gross domestic product in the third quarter,” the institute said in an e-mailed statement. “Almost all indicators have improved recently, even though they’re mostly still at very low levels.”

Germany, the world’s biggest exporter, relies on foreign sales for growth and about a third of all jobs, according to the BGA exporters’ association. The economy unexpectedly expanded 0.3 percent in the second quarter from the first as the global recession waned and companies began to restock.

“After the strong slump in the winter months, world trade and global output reached a trough in the middle of the year,” the BDB banking association, which represents lenders including Deutsche Bank AG, said today in a separate report. “For the current half year, a clear revival already appears assured.”

The BDB said the German economy will contract 5 percent this year before growing 1.5 percent in 2010.

The European Central Bank won’t need to lower its main lending rate to 0.75 percent, the Kiel institute said, revising a June prediction. The central bank will keep its key interest rate at 1 percent through 2010, it said.

To contact the reporter on this story: Rainer Buergin at rbuergin1@bloomberg.net

Last Updated: September 9, 2009 05:00 EDT