BERLIN (Reuters) – Germany's economy will bounce back quickly this year, its central bank said yesterday, as a union for the steel industry that has played a key role in the country's recovery pressed to share the spoils via a hefty pay rise.

Germany will see growth of some three percent in 2010, the Bundesbank said yesterday, up from the two percent it forecast in June and bringing the central bank broadly into line with market expectations.

In a sign that German workers feel emboldened by a record upswing that has also delivered stronger than expected corporate earnings, IG Metall — the country's biggest blue collar union — said it would likely demand a rise of between 4.5 and 8.0 percent for the steel sector next month.

Germany's growth spurt has also tied the single currency zone's economic prospects ever more closely to those of its largest member state — a fact reflected by investors as they bought in to European shares and core government bonds following the Bundesbank report.

The IG Metall pay award could set a benchmark for other industries, one of the union's regional leaders said.

Any rise in the range the union wants would help boost domestic demand but also threaten to undermine the competitive edge that more than two years of wage restraint have given the export industries that have underpinned the recovery.

Sales abroad have helped Germany accelerate away from its regional peers, with growth surging to 2.2 percent in the second quarter — the fastest expansion since the country's reunification 20 years ago, and well ahead of the one percent registered by the euro zone overall.

Although only around 110,000 work in the steel industry in Germany, IG Metall's demand will surpass the 4.5 percent claim it made last year, when it finally settled for a wage increase of 2.0 percent, plus a one-off payment of 350 euros. "(The pay rise) will end up being somewhere in between (4.5 and 8.0 percent)," said Oliver Burkhard, head of IG Metall in the western state of North Rhine-Westphalia. "For us, this is the first pay round since the crisis. The crisis was yesterday."

Burkhard said he expected the steel pay talks to have an impact on negotiations in other sectors.

"We're a mark that will offer a steer to others," he said.

Germany, which runs a current account surplus and relies heavily on exports to drive growth, has come under pressure from France and some other countries to boost domestic demand to help address economic imbalances in the euro zone. "I think there are signs that, over time, wages in Germany will start to increase but I don't think we will see a massive increase," said Citigroup economist Juergen Michels, who expected an average pay rise of 2.5-3.0 percent next year.

"There is some increase — it's going to help domestic demand in Germany, so that it's not just an export-driven story for the recovery," he added.

"But it's not likely to lead to a fast erosion of Germany's competitive advantage compared to the other euro zone countries."

In its report, the central bank also suggested the recovery looked well balanced.