The IMF says there is steady employment and pay restraint

The IMF said weaker world trade was slowing the German economy and that the government should take steps to raise the country's growth potential.

A slowing US economy was pulling down growth, it said, and a strong euro and high oil prices also had an effect.

But the IMF said consumption was aided by steady employment and pay restraint.

Berlin has predicted German growth of 1.7% this year, and the European Central Bank and European Commission expect growth to be 1.6%.

Skills shortages

The IMF said labour productivity had accelerated in manufacturing, but not in the service sector.

"Shortages of skilled labour are pronounced," the IMF said.

"To that end, skills shortages need to be addressed by improving education and training, but also by encouraging the immigration of skilled workers," it said.

On Tuesday, figures showed that German business confidence grew unexpectedly in February, despite concerns about the economy.

The closely-watched business climate index from the Ifo Institute rose to 104.1 points in February from January's figure of 103.4.

Ifo regularly asks 7,000 firms about how their business is going and how they expect the next six months to be.