The Bundesbank has said the German economy will grow faster than previously forecast even as Europe's debt crisis presents an "exceptionally high" level of uncertainty.

The Frankfurt-based institution revised up its 2012 growth forecast to 1 per cent from 0.6 per cent predicted in December, citing a robust global economy, cheap financing conditions and solid domestic consumption. Germany's economy, Europe's largest, will expand 1.6 per cent in 2013, less than the previously forecast 1.8 per cent.

"I expect that expansionary forces will maintain the upper hand if the sovereign debt crisis in the euro area doesn't escalate," Bundesbank President Jens Weidmann said in an e- mailed statement. "Overall, the economic outlook for Germany is much better than in many other economies."

The 17-nation euro region is struggling with a fiscal crisis that has already pushed at least eight members into recession. European Central Bank President Mario Draghi said on June 6 that "heightened uncertainty" was weighing on the economic outlook.

The Bundesbank revised up its inflation forecasts for this year and next. It now predicts annual consumer price gains to average 2.1 per cent in 2012 and 1.6 per cent in 2013. It had forecast inflation of 1.8 per cent and 1.5 per cent, respectively.

The Bundesbank said even though Germany's economy is currently in a "difficult environment," its recovery should continue. At the same time, the projections are "subject to exceptionally high uncertainty and risk," it said. If a softening of economies outside Europe adds to the already bleak euro-area outlook, that could seriously affect the German economy, the Bundesbank said. "If uncertainty eases faster than we assume in our baseline scenario, the very favorable financing conditions could also have a stronger expansionary effect on the domestic economy," Weidmann said.

The ECB this week kept its benchmark interest rate at a record low of 1 per cent, even as some policy makers had advocated a cut. Draghi said the ECB stands ready to act if the situation deteriorates.

Bloomberg