Germany may grow twice as fast this year as earlier thought, Bundesbank says

FRANKFURT, Oct 2 (Reuters) - The German economy could grow around 1% this year — roughly twice as fast as the most recent projections — driven by robust export demand and government investment, Bundesbank President Joachim Nagel said on Friday.

Germany, the world's third-largest economy, has barely expanded for the past three years and the Iran war is expected to weaken it further, as expensive energy hits its industries.

But output has been surprisingly resilient and the country is in a cyclical upswing, even if its potential growth remains sluggish, Nagel said in a speech in Frankfurt. 

"It's quite possible that we'll see real economic growth of around 1% on average for the year," Nagel said. "After three years of stagnation, that would indeed be a small but welcome sign."

The Bundesbank predicted annual growth of 0.5% in June. While this is among the more pessimistic projections, nearly all major forecasters had seen growth well below 1%. 

"One driver of economic growth is the federal government's fiscal package, meaning the debt-financed extra government spending focusing on defence, infrastructure and climate protection," Nagel said. 

Germany is benefiting from unexpectedly robust demand from abroad, he added.

Germany's surprisingly strong performance is a key to why forecasters keep upgrading their euro zone projections and now see the bloc expanding at or above its 1% growth potential this year.

The downside is that resilient growth means more inflationary pressures and this could force the European Central Bank to raise interest rates even further as price growth is now near twice its 2% target and could accelerate further.   

(Reporting by Balazs Koranyi; Editing by Andrew Heavens)