Confidence is growing among business leaders that Angela Merkel will lead the country out of its economic slump, but nagging doubts persist. Derek Scally reports from Berlin

This is a tale of two Germans. One's glass is half-full, and he is waiting expectantly for it to fill up in 2006. The other's glass is half-empty and he expects it to be knocked over by 2007 at the latest.

Germany's economic record for 2005 was a mixed bag: growth is likely to average out at around 0.9 per cent, with unemployment still stuck at over 10 per cent.

Meanwhile exports surged ahead, with a record trade surplus of €14.8 billion in September, reinforcing Germany's status as the world's leading exporter.

For 2006, most economic institutes in Germany are predicting the end of the country's economic slump and are out-doing each other with optimistic growth forecasts.

But not all are convinced, with some predicting a one-year flash in the pan unable to stop a long-term trend of mass lay-offs, company closures and a continued exodus of jobs to central and eastern Europe.

The new government has been hard at work since taking office in November; its first cabinet meetings have been a series of slash and burn events, cutting subsidies and spending with the aim of bringing German borrowing within euro-zone guidelines by 2007.

Some 74 per cent of business leaders questioned by Capital business magazine say they believe Dr Merkel will be a strong chancellor, a view reflected in the Ifo confidence index, which reached its highest level in five years in December.

Two-thirds of the 7,000 managers surveyed by the Ifo expect an upswing in the next six months, while the institute increased its 2006 growth forecast to 1.9 per cent.

The Ifo economists, with their talk of "cautious but solid" growth, are in good company: the six leading economic institutes have issued growth predictions ranging from 1.4 to 1.7 per cent, all above their joint autumn prognosis of 1.2 per cent.

The optimists are pinning their hopes on several one-off special boosts to the German economy in 2006.

Economists expect the World Cup to boost earnings by up to 10 per cent in the hotel and restaurant sector. Some also talk of an extra psychological boost they refer to as the "Klinsmann effect", after the German national football coach.

"The problem in Germany is that the mood is always worse than the reality," said Mr Wolfgang Twardawa, head of marketing at the society for consumer research (GfK). "If Klinsmann manages to bring about a psychological economic boost, that'll be good for us."

The government's plan to raise VAT by two points in 2007 is likely to result in another one-off economic boost next year, as consumers rush to buy consumer electronics and replace expensive items like cars, kitchens and furniture before they get even more expensive.

All this extra consumption could be financed by huge levels of savings - 11 per cent on average in Germany. Even spending just one per cent of that would pump €16 billion into the German economy.

But not everyone is convinced that Germany is out of the woods for good.

"We do not share the enthusiasm and good cheer that other institutes are spreading around the country like Santa Claus," said Dr Udo Ludwig of the IWH institute in Halle. It is one of two leading economic institutes that say next year's growth will be just a flash in the pan, quickly extinguished in 2007 with a slump back into stagnation and perhaps even recession.

The spending rush ahead of the VAT hike in 2007 is unsustainable and will be short-lived, they say, forcing Germany back into its vicious circle of low growth and high unemployment. Surveys show that German companies will only start hiring again when economic growth hits 2.75 per cent. That's a long way from even the most optimistic growth forecast of 1.7 per cent next year, and unemployment is only expected to drop marginally from 4.8 to 4.7 million in 2006.

Underlying all this is consumer demand held back by nervousness about job insecurity, as Germany's best-known companies continue to cut jobs.

Deutsche Telekom plans over 19,000 redundancies by 2008; DaimlerChrysler wants to cut 8,500 jobs in 2006; West Landesbank wants 1,200 redundancies; while tyre-manufacturer Continental is seeking 320 job cuts.

What makes most of these redundancy announcements so bitter for workers is that they go hand- in-hand with news of record profits.

Deutsche Bank, Germany's largest financial institution, is cutting 3,700 jobs despite an 87 per cent rise in profits to €2.5 billion. Siemens is cutting 4,000 jobs in Germany despite profits of €3.4 billion, the second-highest in the firm's history.

Many believe this is the flipside to the dissolution of Germany Inc, the post-war system of company cross-holdings in Germany that kept foreign investors out and earning expectations moderate.

If anything, 2005 will be remembered in Germany as the "year of the locusts", the pejorative badge a leading politician pinned on international investment funds that he said descend on German companies, pick them clean and move on.

There are dozens of stories like that of Grohe Water Technology, once Germany's most successful manufacturer of kitchen and bathroom fittings, with nearly 6,000 employees worldwide.

Six years ago the Grohe family sold its company to the BC Partners investment group for €900 million. The new owners had borrowed the purchase price from banks, and left the company cover the repayments and interest.

By the end of 2004 the company was €760 million in debt; this in a company that, in 2003, had a turnover of €889 million and a profit of €186 million. Earlier this month, the 300 employees from one Grohe plant in Herzberg near Berlin were made redundant.

By 2007, the investment consortium wants to cut costs by a further €150 million by cutting another 943 jobs in Germany and outsourcing production to Portugal and Thailand.

"This is a model case of a healthy company being sucked dry," said Detlef Wetzel of the union IG Metall.

The closures will hit hard in Herzberg, a town that already has an unemployment rate of 20 per cent, nearly twice the German average.

"The closure is a financial disaster, and will lead to around €500,000 less in tax income," said Michael Oecknigk, the local mayor.

"That's the money with which we finance the library, the swimming pool and the small zoo," he said.

It's an everyday story in Germany these days, but still a relatively new, bitter experience, and one of the main reason many Germans still see their glass as half empty.