The German government on Wednesday raised its economic growth forecast this year to 1.7 percent, predicting Europe's biggest economy will be able to withstand the widely expected global economic slowdown.

"Domestic demand is increasingly playing a role in economic growth alongside exports," Economics Minister Michael Glos said in a statement after releasing the annual economic report.

The impact of the hefty rise in value-added tax on the economic growth is weaker than expected, analysts said.

The German economy expanded by 2.5 percent last year, the fastest in six years. The government had previously estimated the economy to grow by 1.4 percent in 2007.

German exports are expected to grow 7.9 percent this year following an increase of 12.4 percent in 2006, according to the report.