Germany's Jobless Rate Declines to Lowest in 16 Years

By Brian Parkin

Aug. 28 (Bloomberg) -- German unemployment fell more than economists expected in August, pushing the jobless rate to the lowest level in 16 years.

The number of people out of work, adjusted for seasonal swings, dropped 40,000 to 3.2 million after falling 20,000 in July, the Federal Labor Agency in Nuremberg said today. The rate fell to 7.6 percent, the lowest since May 1992. Economists expected a decline of 10,000 and an unchanged rate of 7.8 percent, the median of 31 forecasts in a Bloomberg survey showed.

The German economy, Europe's largest, shrank in the second quarter as companies cut back on investment, suggesting that payrolls may follow. German business confidence fell to a 36-month low in August. Still, the job market may not deteriorate as fast.

``Unemployment will continue to decline, if at a weaker pace,'' said Gregor Eder, an economist at Dresdner Bank AG in Frankfurt. ``The development of the labor market is still very healthy with companies creating jobs. That's positive.''

The Labor Agency's IAB institute recorded 1.13 million job openings in the second quarter, 15,000 fewer than in the previous three-month period. Situations vacant will decline ``over the medium term,'' the IAB said on Aug. 11.

`Trailing Indicator'

``The labor market is a trailing indicator,'' said Hans-Peter Kloes, a labor-market analyst at the IW Cologne economic institute. ``It lags about six months behind other economic indicators such as industrial production.''

Labor Agency Vice President Heinrich Alt sees a chance ``a bit above 50 percent'' of unemployment falling below 3 million in November, he said at a press conference in Nuremberg.

Some companies will continue to expand their workforce this year and next. Germany's small and medium-sized companies will hire 400,000 more people over the next 12 months to meet export demand, Dresdner Bank AG economists said in an e-mailed note to clients on Aug. 19.

Plasma television maker Loewe AG is hiring even as growth slows. ``You don't hire and fire in this environment, you wait to see when you can hire more,'' the Kronach-based company's Chief Executive Officer Frieder Loehrer said today. ``The economy's dipped somewhat, but it will pull up again and companies have to be prepared.''

Solar Boom

Jobs in Germany's solar industry, helped by subsidized domestic demand and export orders, are ``booming,'' said Thomas Krupke, chief executive of Berlin-based Solon AG, a maker of photovoltaic equipment. ``It's non-stop hiring.''

Solon will add another 60 staff to its 900 workers this year to help meet orders, 75 percent of which are from abroad.

Still, evidence is mounting that Germany may face a recession. Germany's economy contracted for the first time in almost four years in three months through June and the economy of the euro region, destination for most of Germany's exports, shrank for the first time since the euro was introduced a decade ago.

Rising oil and food prices that helped push inflation to 12- year high of 3.5 percent in July are sapping private consumption, creating an ``Achilles Heel'' for the economy, said Economy Minister Michael Glos said on Aug. 26.

German consumer confidence is at a five-year low and retail sales dropped more than twice as much as economists expected. At the same time, the euro's 9 percent gain in the past year is taking its toll on foreign demand. Factory orders unexpectedly fell for a seventh month in June.

ECB Limit

Borrowing costs at a seven-year high may weigh on companies in the euro region as long as inflation remains at almost twice the European Central Bank's limit. ECB council member Axel Weber said this week there's no scope for interest-rate cuts and policy makers may need to raise borrowing costs once the economy emerges from its slump.

The ECB raised its benchmark interest rate last month by a quarter point to 4.25 percent after inflation accelerated to twice the central bank's 2 percent ceiling.

According to the latest comparable data of the Organization of Economic Cooperation and Development, Germany's jobless rate was 7.3 percent in June. France, Germany's main trading partner, reported 7.5 percent unemployment compared with 4.1 percent in Japan and 5.5 percent in the U.S. The OECD average that month was 5.8 percent.

``At the large industrial companies we see a trend of ongoing job cuts,'' the Labor Agency's Alt said. ``But we see continued stable employment at medium sized companies.''

To contact the reporter on this story: Brian Parkin in Berlin at bparkin@bloomberg.net