The new German government should increase public investment in physical and human capital in order to boost productivity to counter unfavorable demographic trends down the line, the International Monetary Fund (IMF) said in Berlin on Monday.
The plea comes after new German Finance Minister Olaf Scholz came under fire at home for presenting a budget this month that foresaw only modest spending increases until 2022, even as the country's infrastructure is crumbling and tensions with trade partners are mounting.
In its annual country report, the IMF said it welcomed some of the spending plans laid out by the new coalition government, including investments in high-speed internet and efforts to improve daycare options to get more women into the workforce.
"But further policy action is needed to more decisively boost domestic investment, which would also support external rebalancing," the IMF said.
Noting that the domestic economy was performing well, the IMF said the government should invigorate competition-enhancing reforms and enhance the environment for entrepreneurship and venture capital.
"This would help boost productivity growth and further spur private domestic investment," it said in a statement following an official staff visit to Germany.
In the light of a tight labor market, pension reforms to lengthen working lives should be introduced. This would mitigate the need for workers to save for retirement and lower the risk of old-age poverty, it said.
The IMF said the short-term outlook was "for continued robust growth, on the back of solid consumption, rising investment, and dynamic exports."
But it predicted growth would decline as the economy was limited "by Germany's unfavorable demographics and still-low productivity growth."
Headline and core inflation, which are still low, are expected to pick up, reflecting tight market conditions. It pointed to risks on the horizon in the shape of rising protectionism, geopolitical uncertainty and a lack of reform in the euro area.
The report highlighted continuing immigration and "good progress in integrating refugees in the labor market," but also noted workforce shortages in construction, IT and the care sectors, which would put upward pressure on wages and prices.
Planned investment in all-day childcare and all-day schooling would make it easier for women to work full-time, it said.
Germany's massive trade surplus, which stood at some 245 billion euros ($294 billion) last year, has long caused friction with European peers and the United States, who complain it is costing growth and jobs in their own economies.
US President Donald Trump has been one of the loudest critics of the chronic imbalance, but French President Emmanuel Macron last week also urged Berlin to abandon its "perpetual fetish" for surpluses, "because they come at the expense of others".
They are unlikely to have been impressed by Scholz's first budget plans, unveiled at the start of the month, which will see public investments drop from 37.0 billion euros in 2018 to 33.5 billion in 2022 -- despite estimates of record tax revenues and federal budget surpluses.