Germany's export-oriented economy faces a period of weak growth with significant downside risks to activity, as the global economy slows and uncertainty over the euro zone debt crisis lingers, the OECD said in a report on Tuesday.
The Organisation for Economic Co-operation and Development maintained the forecast it gave in November for economic growth to slow in 2012 to 0.6 percent after a rapid recovery from the 2008/09 financial crisis.
The economy is facing a soft patch with significant downside risks to activity, the Paris-based think tank said in its report.
On the domestic front, a return to lower growth rates from the strong prior upswing was to be expected...as potential growth remains weak, it said. This downswing is exacerbated by the substantial deterioration of world trade growth and a loss of confidence due to the euro area debt crisis.
Germany's export-driven economy recovered quickly from the 2008/09 financial crisis but the euro zone's debt troubles and a global slowdown have cast a shadow over its growth outlook.
A first official estimate for gross domestic product (GDP) in the fourth quarter points to a slight contraction.
However, economic sentiment data from the ZEW institute on Tuesday was far better than expected and the think tank said there was a good chance at a slight uplift in the second half.
The OECD reiterated its long-standing call for Germany to deregulate and improve innovation in its service sector, in order to foster domestic demand.
However, it noted this would likely do little to boost exports from partners like France, which often complain weak German demand is causing euro zone imbalances.
Germany accounts for under 3 percent of GDP in France, Spain and Italy, and Germany's import propensity is rather small, the OECD wrote.
A rise in domestic demand is unlikely to translate into much growth support for other countries, it said.
The OECD also urged Germany to increase the workforce and productivity in order to offset the drag of an ageing population, partly by doing more to encourage women to work.
It said the medium-term growth potential, which remains low at around 1.5 percent, is set to decline to below 1.0 percent after 2020 due to demographics.
More needs to be done to strengthen the growth potential, not least in view of rapid population ageing, it said.
This could be achieved by modifying the tax system which favours single-earner over dual-earner couples, and eliminating free health insurance for non-working spouses.
The marginal tax rate for secondary earners when moving from marginal employment into regular full-time employment thus needs to be lowered in order to raise incentives to work longer
hours, the OECD said.
The OECD said Germany should also exploit new sources of growth through environmental policies, by ensuring competition in the energy sector and fostering the framework for eco-innovation.
(Reporting by Brian Rohan. Editing by Jeremy Gaunt.)