Germany's would-be coalition partners have reached agreement on a law to attract skilled immigrants, German media reported on Tuesday, suggesting the parties are edging closer to a decision to open formal coalition negotiations.

Conservative Chancellor Angela Merkel is betting on the reluctant Social Democrats (SPD) to give her a fourth term after 12 years at the helm after her initial efforts to form a coalition with two smaller parties failed in November.

But many in the SPD oppose a repeat of the "grand coalition" that governed for the past four years as they fear it will further weaken the center-left party, which suffered its worst result in September's vote since 1933. Some SPD members are also concerned that a new grand coalition would make the far-right Alternative for Germany (AfD) the main opposition party.

Immigration is one of the most sensitive topics in the talks. German newspaper network RND cited a paper from a working group in the exploratory talks as saying the parties had agreed that skilled workers should be encouraged to come to Germany in an orderly way. But they disagreed on the law's name, it said.

More than a million migrants, many of them fleeing conflict in the Middle East, have arrived in Germany since mid-2015 but many have struggled find their feet in the labor market due to a lack of language or vocational skills. Europe's largest economy needs skilled labor given its ageing population.

The understanding on that topic, following compromises on tax and carbon emissions policy achieved on Monday, indicates the parties could strike a deal to end the political impasse in Germany more than three months after the national election.

The political uncertainty has not cast a shadow over the booming economy, with the government on Tuesday raising its 2017 growth forecast and saying it expected the upswing to continue this year.

That is having a knock-on effect on public finances. The financial daily Handelsblatt reported that the government had a stronger-than-expected surplus in 2017 and that, combined with unused funds earmarked for asylum seekers, means it has 10.4 billion euros more to spend than planned.

The extra cash should make it easier for the parties to paper over their differences with freer spending.

Making Progress

RND also reported that the parties had agreed to expand fast internet around the country by 2025, an investment they expected to require up to 12 billion euros in public financing during this legislative period.

The parties further agreed on tax incentives to promote research and investment in digitalization, RND said.

The conservative bloc and SPD have agreed to keep mum during the five days of exploratory talks due to end on Thursday but senior members of both groups suggested talks were progressing well.

Senior conservative Volker Kauder said the negotiations had been "good" and the participants were on track to decide by Thursday whether to progress to full-blown negotiations. The SPD will then ask its members to vote on that.

SPD leader Martin Schulz said the party chairs had held a "good discussion" on European Union reform - another topic expected to prove contentious during the talks - but did not give any specifics.

Peter Altmaier, acting finance minister and Merkel's chancellery chief, said negotiations were tough and it was necessary to recognize "that we need to pull ourselves together because the people expect that", and the parties needed to be prepared to enter into compromises on some points.