"Germany is not currently an economic locomotive in Europe. Its imports of goods from other European countries are substantially a reflection of global demand: as world trade grows, German exports rise," the IMF said in its 2011 report on the state of the German economy.
Much of its growth is driven by exports and "Germany's domestic demand is less buoyant and does less to stimulate European growth in the short run," the IMF said.
"German GDP movements are still largely a function of world trade.... That needs to change, so that Germany will be able to pull the rest of Europe along with it on a path to higher growth," it added.
Germany escaped lightly from the impact of the world financial crisis, but this does not resolve its long-term problem of low potential growth, the IMF said.
"While Germany escaped the crisis with little permanent damage, its long-term growth prospects, estimated by staff at about 1.25 percent annually, remain low" if reforms are not implemented, the IMF said.
"Germany can do better," Juha Kahkonen, deputy director of the IMF's European department, said in a telephone conference call.
"Germany can raise its goals in the medium term" by stimulating domestic growth and encouraging employment, especially by women and older people at a time when the ageing of the population leads to a gradual decline in the working population, he added.
Speaking of the financial sector, the IMF said banks had stabilised in Germany in the wake of the financial crisis, but added that "pockets of vulnerability remain."
"German banks remain highly leveraged, achieve low profitability, and the large banks remain highly dependent on market funding," the report said. "While the overall level of direct exposure to spillover risks from
Elsewhere in Europe is limited, some banks are more exposed than others and indirect effects through banks outside Germany could have cascading effects," it also warned in the light of the Greek debt crisis.
The European Banking Association on Friday is due to release data on the debt holdings of 91 of the EU's largest banks, 13 of them in Germany, as part of its "stress tests" on financial institutions.