Germany should use its wealth to invest in infrastructure that will enhance its growth potential, and encourage employers to raise wages for higher consumption, the International Monetary Fund says in a report.
In a report released on Monday and following the IMF's annual "Article IV" meeting with the German government, the global crisis lender largely praised Europe's biggest economy, but said there was room for improvement.
Germany's large and persistent current account surplus - 8.3 percent of gross domestic product (GDP) last year - reflected high domestic savings and better investment opportunities abroad, the Washington-based lender said.
Therefore, Germany should embrace a set of coordinated fiscal and structural policies to safeguard its strengths and address remaining challenges, including reducing external imbalances.
Germany's current account surplus has been a source of constant friction with the United States, the IMF and some eurozone peers, which have urged Berlin to do more to boost lackluster domestic demand.
Germany has pushed back, arguing that it is increasing investment and that the surplus is partly due to the attractiveness of German products, for which the country should not be punished.
Nevertheless, the IMF insisted in its report that the country's fiscal space should be used for investment in physical and digital infrastructure, childcare, refugee integration, and relief of the tax burden on labor.
Noting that income inequality had largely stabilized, the IMF warned that poverty risks still existed.
In this regard, the report also raised concern that adverse demographics could have a negative impact on the nation's long-term growth prospects. Therfore, it recommended further pension reforms that would make it more attractive to work longer.
Looking at Germany's role in the broader eurozone, the fund noted that a sustained rise in wage and price inflation in Germany was needed to help lift inflation in the euro area and facilitate the normalization of monetary policy.
Concluding its report, the IMF called on German authorities to do more to monitor a mortgage market that was "in danger of overheating."