HAMBURG -- Chancellor Angela Merkel's party is meeting Friday to elect a new leader who could help shape Germany's political direction for the next generation.

A close ally of Merkel's and a one-time rival are considered favourites for the job to lead the centre-right Christian Democratic Union.

Merkel announced in October she would give up the reins in her party, though she has said she plans to remain chancellor until the end of the current term in 2021. However, it's possible elections could be called before then.

Three high-profile contenders have spent the last month touring Germany to drum up support. Major German parties have tended to determine their leaders without a contest, and this is the first open competition for the CDU leadership since 1971.

The outcome is hard to predict, and the race between the two favourites is expected to be close. Whoever wins will be favourite to run for chancellor in the next election, though that isn't automatic.

The favourites are CDU general secretary Annegret Kramp-Karrenbauer, a Merkel ally who is widely considered the chancellor's preferred successor and is closest to her centrist stance; and Friedrich Merz, a former leader of the party's parliamentary group who stands for a more conservative approach and is seeking a comeback after a decade away from front-line politics.

Both have prominent backers, though many CDU grandees -- including the chancellor -- have held off publicly endorsing a candidate.

Health Minister Jens Spahn, another Merkel critic, is considered the outsider. At 38, he would stand for a change of generation. Kramp-Karrenbauer is 56 and Merz 63, only a year younger than the chancellor.

The choice will be made by 1,001 delegates at a party congress in Hamburg, many of them professional or part-time politicians at federal, regional or local level.

Merkel has been CDU leader since 2000 and chancellor since 2005. She moved her party relentlessly to the centre, dropping military conscription, accelerating Germany's exit from nuclear energy, introducing benefits encouraging fathers to look after their young children and allowing the introduction of gay marriage.

Most controversially, she allowed large numbers of asylum-seekers into Germany in 2015.

For years, Merkel's popularity lifted the CDU and its Bavaria-only sister party, the Christian Social Union. In the 2013 election, they won 41.5 per cent of the vote and only just fell short of an outright parliamentary majority.

At present, the centre-right bloc is polling under 30 per cent. Merkel's fourth-term governing coalition with the centre-left Social Democrats has lurched through a series of crises since taking office in March, and the CDU has lost supporters both to the liberal Greens and the far-right Alternative for Germany.

Merkel said Thursday that 18 years at the helm "is a long, long time -- and the CDU has, of course, experienced ups and downs in this time," but also won four consecutive elections.

"I am grateful for the time that is behind me, and I am glad for being able to continue working as chancellor," she said.