Germany's economy will contract less this year than previously projected and its rebound will accelerate once the economy can start to reopen from the second wave of the pandemic next year, the country's central bank said.
With much of the euro zone in partial lockdown, the bloc's economy is expected to shrink this year.
But the arrival of a vaccine is raising hopes that life can return to normal by the end of 2021.
Germany's economy could shrink by 5.5% this year on a calendar-adjusted basis, beating an earlier expectation for a 7.1% drop.
But next year's growth is now seen at 3%, below a June forecast for 3.2%, the Bundesbank said in a biannual update of its projections for the euro zone's biggest economy.
"Our projections anticipate a sharp rebound in GDP after the final quarter of 2020 and the first quarter of 2021," Bundesbank President Jens Weidmann said.
"We expect the containment measures to be loosened gradually in spring 2021 thanks to medical advances and consumption opportunities to be taken again," he said.
The recovery will then accelerate, and by 2022 growth could hit 4.5%, beating the previous projection for 3.8%.
The European Central Bank approved a fresh stimulus package yesterday, saying 2021 would remain difficult, but predicting that vaccinations could lead to sufficient levels of herd immunity by the end of the year.
Inflation in Germany is expected to accelerate quickly next year, but mostly due to the expiry of a temporary cut in value added tax.
Price growth will then slow again and remain well short of the ECB's almost 2% target.