It is "of crucial importance for the balance of German economy" that it starts "relying less on price competitiveness and more on innovation," while also "strengthening the role of the service sector," OECD Secretary General Angel Gurria told a press conference in Berlin.
Improved education and more domestic market competition would help Germany emerge from the economic crisis with a stronger economy, the Organisation for Economic Cooperation and Development added in its 2010 survey of Europe's biggest economy.
"While many reforms have been put in place already, more needs to be done to boost potential growth in sectors serving domestic demand," it added.
The comments echo those of economists who say Germany's strong export sector needs help to ensure a sustained recovery from the country's worst post-war recession, when output contracted by more than five percent.
Some eurozone trading partners have also pressed Berlin to stimulate domestic demand rather than strive to become more competitive, suggestions that have gotten a cool reception from German media and authorities. They argue that Europe should take its lead from those best able to compete with economies in Asia and the Americas.
Gurria noted that "Germany was operating with the same currency, the same trade rules, on a level playing field" with its eurozone critics.
Meanwhile, while unemployment has resisted the downturn better than feared, at around 8.7 percent of the workforce in February, the OECD said: "The crisis has revealed the risk that a dual (level) labour market may emerge.
A growing trend to use more temporary workers could trap them in unstable jobs that hampered their careers and overall productivity, the report said.
"Countries with a large difference in regulation between regular and temporary work contracts are at risk of developing a dual labour market, as has occurred in Spain and Japan," it warned.
The OECD forecast that the German recovery would be "relatively slow" and that unemployment and the public deficit would rise further.
Berlin's fiscal policy "needs a specific exit strategy with focus on consolidating public finances over the coming years," the report said.
The German government forecasts economic growth of 1.4 percent this year, while the OECD advanced an estimate of 1.3 percent, with a 1.9 percent expansion in 2011.
"The GDP (gross domestic product) level prevailing at the beginning of 2008 is projected to be reached again only by 2013," it added.
"The challenges going forward are to ensure the continued high performance of the export sector and broaden this performance to the other sectors of the economy," the OECD concluded.