Germany has failed to exploit its solid growth performance and healthy state finances to invest in its economy and to implement much needed reforms, the Organization for Economic Co-operation and Development said on Tuesday.
"Germany must now use his strength to prepare for the future, in particular through the successful integration of refugees who have a perspective to stay," said Angel Gurria, who heads up the Paris-based OECD.
"The recent large inflow of refugees should help to dampen the impact of demographic change on labour supply in the medium term, but comprehensive policies will be needed to integrate the newly arrived immigrants into German society and the labor market," the OECD said.
About one million refugees arrived in Germany last year, fleeing conflicts in the Middle East and Africa.
Higher investments are critical, "to increase productivity and living standards," the OECD said in its latest survey of the German economy.
Despite a stable economy and a budget surplus, the OECD believes that Germany needs to introduce further reforms in its pension and tax systems as well as its labour market.
The OECD expects the German economy to grow by 1.3 per cent this year before accelerating to a 1.7-per-cent expansion rate in 2017.
The solid labour market combined with the introduction last year of a new minimum wage and cheap oil has boosted wages, which in turn have helped to drive private household spending, the OECD said. This has resulted in the economy becoming less reliant on foreign demand, it said.
"Private households ... are projected to remain the main driving force for growth," the OECD said.
But the OECD said that the nation's retirement age needed to be raised and that an overhaul of the tax system was long overdue.
"The tax burden and social costs for labour in Germany are higher than in many other OECD economies," the OECD said.
The German retirement age is at present being progressively raised from 65 to 67 by 2029.
But the OECD warned that without further rises in the retirement age Germany could face increasing budget deficits.
The organization went on to say that Germany should follow the example of other countries and link the retirement age to life expectancy.
The publication of the OECD report came as fresh data showed Germany's industrial sector struggling in the face of weak foreign demand.
German industrial orders unexpectedly fell in February as foreign demand slumped, the Economics Ministry said.
Monthly factory orders dropped 1.2 per cent in February after a 0.5-per-cent rise in January. Analysts had forecast for a 0.3-per-cent gain in February.
Driving down the February data was a 2.7-per-cent drop in foreign demand, in particular from Germany's key trading partners in the eurozone with monthly orders to the currency bloc declining by 3.7 per cent.
Orders to countries outside the eurozone dropped by 2.1 per cent in February, adding to signs of the impact on the German economy of the slowdown in China and other leading emerging markets.
However, domestic German orders rose 0.9 per cent, as a result helping to compensate for the sharp fall in foreign demand.