By Michelle Martin
BERLIN, April 21 (Reuters) - Germany's economy stabilised in the first quarter, after contracting late last year, the finance ministry said on Monday, though consumption, which is expected to drive growth this year, has not picked up significantly.
Europe's largest economy, which held up well during the first two years of the debt crisis in the euro zone, has felt the impact of weak demand in the currency bloc in the past year.
Most economists, however, expect Europe's economic powerhouse grew slightly in the first quarter of this year, avoiding recession, which is defined as two consecutive quarters of falling quarterly gross domestic product (GDP).
"After a significant economic downturn at the end of last year, overall economic activity in Germany probably stabilised in the first quarter," the finance ministry said in its monthly report.
German GDP shrank by 0.6 percent in the final quarter of last year from the previous three months as companies unnerved by the euro zone crisis made fewer investments and trade slowed.
"Looking at the real economic indicators, it seems that German industry has not yet completely overcome a weak phase," the ministry said in its report.
"But a range of economic data points to the economy regaining momentum over the rest of the year," the ministry added, citing a stabilisation in industrial orders and upbeat sentiment indicators.
The government has forecast the economy will expand by 0.4 percent this year, half the 0.8 percent growth forecast by the country's leading economic institutes. German growth slowed to 0.7 percent last year.
Germany is due to release preliminary first-quarter GDP data on May 15.
Indicators on consumer, investor and business sentiment have been broadly positive this year but hard data has generally been more muted, leading some economists to say sentiment surveys have overshot actual performance.
In March, the manufacturing sector shrank slightly, according to a purchasing managers' index, while the latest investor and business surveys show confidence has fallen.
The finance ministry said recent indicators did not suggest private consumption had picked up significantly at the beginning of the year, pointing to an Ifo survey which showed firms considered retail conditions to be a little worse in the first quarter than in the fourth quarter.
"The moderate development of sales tax revenue does not point to buoyant consumption either. Positive developments on the labour market and the stable price climate do, however, suggest that private consumption will support growth this year too."
Economists expect domestic demand, supported by wage growth, to drive economic growth this year as weak euro zone demand has dented exports.
The finance ministry report showed Germany's tax revenues increased by 5.7 percent in March from a year earlier to 51.7 billion euros, helped by a 5.7 percent increase in income tax intake and a 5.2 percent rise in sales tax revenues.
Income tax revenues have been boosted by the stable labour market, where the jobless rate, at 6.9 percent, is close to its lowest since the country reunified more than two decades ago. That contrasts starkly with Germany's austerity-hit euro zone peers like Greece and Spain, where around one in four workers cannot find a job.