German Decline in Unemployment Slows as Economy Cools

By Rainer Buergin

July 31 (Bloomberg) -- German unemployment, enjoying its longest decline since reunification in 1990, fell at a slower pace in July as the economy cooled.

The number of people out of work, adjusted for seasonal swings, dropped 20,000 in July to 3.25 million after falling 38,000 in June, the Nuremberg-based Federal Labor Agency said today. Economists expected a decline of 20,000, according to the median of 30 forecasts in a Bloomberg News survey. The adjusted unemployment rate held at 7.8 percent, a 16-year low.

Companies in Europe's largest economy are becoming reluctant to hire as the outlook darkens. Business confidence fell the most this month since the Sept. 11 terrorist attacks seven years ago and consumer confidence fell to the lowest since June 2003. Even so, July's drop in the jobless total is the 38th in 40 months.

``It's clear that this isn't going to continue for very much longer,'' said Eckhart Tuchtfeld, an economist at Commerzbank AG in Frankfurt, who expected the jobless total to decline by 20,000. ``Risks for economic growth have clearly increased.''

Today's news followed an unexpected drop in manufacturing orders in May, the sixth straight decline, and the biggest decrease in industrial production in more than 9 years that month.

`Positive'

``The labor market's dynamism has decreased somewhat compared with a year ago,'' said Frank-Juergen Weise, the chief of the Labor Agency, in a Bloomberg Television interview. ``But the development remains positive overall.''

In Europe, the main destination for German exports, factory orders dropped more than twice as much as forecast in May. Growth in the U.S., the biggest buyer of German cars and chemicals outside Europe, will slow in the second half, according to an index of leading economic indicators published July 21.

``The labor market is a trailing indicator,'' said Tuchtfeld. ``It follows hard data such as manufacturing orders and industrial output and indicators like business sentiment with a time lag.''

Signs that the expansion is also cooling on the other side of the Atlantic may ease concern at the European Central Bank that prices are getting out of control. The ECB increased its main lending rate to a 7-year high of 4.25 percent this month as inflation accelerated to 4 percent, the fastest pace 16 years.

European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said ``there's a risk of stagflation, and of course I'm worried about it,'' Finnish newspaper Kauppalehti reported on July 18, citing an interview. Stagflation is a combination of high inflation and sluggish growth.

Still Hiring

While the U.S. probably lost jobs in July for a seventh straight month, companies in Germany are still hiring. Amadeus Fire AG, a temporary-employment agency, recruited more than 600 specialists in the second quarter. Software company PC-Ware AG said July 1 it will add up to 50 people in Germany this year in consulting and sales to the 1,485 it already employs.

With next year's growth expected to be half of this year's, hiring may end. The prospect of a continued drop in unemployment is ``on a knife edge,'' Manfred Weber, managing director of the BDB banking association, said July 29.

Seventy-seven percent of Germans expect ``high'' unemployment to remain a problem ``long-term,'' according to a Forsa survey commissioned by Stern magazine. Forsa polled 1,000 people on July 24 and July 25. The margin of error was 3 percentage points.

The jobless rate in the 15 euro nations probably held at 7.2 percent in June, the lowest since the data series began in 1993, according to the median of a Bloomberg survey of 33 economists. Eurostat will publish the figures today at 11 a.m.

According to the latest comparable data from the Organization for Economic Cooperation and Development, Germany's jobless rate was 7.4 percent in May, the same as in France, and compared with 4 percent in Japan and 5.5 percent in the U.S. The OECD average that month was 5.7 percent.

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net.