German Unadjusted Unemployment Drops Below 3 Million

By Rainer Buergin

Oct. 30 (Bloomberg) -- German unemployment defied the global financial crisis in October and fell below 3 million for the first time in 16 years, extending its longest drop since reunification.

The unadjusted number of people out of work fell to 2.99 million, the Nuremberg-based Federal Labor Agency said today. That's the first time since November 1992 it breached the 3 million mark and down from a post-World War II peak of 5.3 million in February 2005.

``We're benefiting from the high order backlogs that have accumulated over time,'' Ralph Wiechers, chief economist at the VDMA machine makers association, said in a telephone interview. ``Even now, order inflows remain strong.''

Companies are taking their time to adjust payrolls to a cooling economy. German business confidence declined to the lowest level in more than five years this month as the economy struggles to recover from a second-quarter contraction.

The number of people out of work, adjusted for seasonal swings, dropped 26,000 to 3.15 million after falling 29,000 in September. Economists expected a decline of 10,000, according to the median of 22 forecasts in a Bloomberg News survey. The adjusted unemployment rate fell to 7.5 percent, a 16-year low.

Frankfurt-based VDMA said yesterday that orders for machinery increased 2 percent last month from a year earlier when adjusted for inflation. Foreign orders rose 4 percent while domestic orders declined 1 percent. Germany is the world's largest exporter.

Behind the Curve

Half a dozen years of global growth at more than 3 percent has filled order books at German companies and expanded payrolls. In adjusted terms, unemployment has fallen 32 consecutive months.

As the world economy cools in the wake of the financial crisis, that trend will probably reverse and become a political issue next year, when Chancellor Angela Merkel's Christian Democrats and their Social Democrat coalition partners contest national elections in September.

Employment is a ``lagging indicator'' of the economic state and benefits from ``high capacity utilization'' even as growth slows, Wiechers said. Indications of intended job cuts, as revealed by Ifo's business survey, must persist for quite some time before actually affecting the labor market, he said.

Less Impact

``The weaker economy will have an impact on unemployment, but less so than in the past,'' said Frank-Juergen Weise, the head of the Labor Agency. ``Policy changes such as the rise of mini-jobs are putting people in registered employment where before they'd be unemployed.''

Before companies fire workers, they stop taking on new staff. Deutsche Lufthansa AG, Europe's second-biggest airline, said yesterday it will freeze hiring and cut spending. The financial crisis has taken on ``new dimensions that have seriously impaired the prospects for the world economy and for passenger air traffic,'' the company said in a statement.

German unemployment may end three years of near-continuous decline in 2009 as economic growth grinds to a halt, the Labor Agency's IAB research unit said this week. The number of jobless may increase by an average 30,000 next year to a seasonally- adjusted 3.29 million, the IAB said in a report.

Sentiment among shoppers is holding up so far, helped by a drop in heating oil and gasoline costs. Consumer confidence rose for a second month, GfK AG said Oct. 28, citing its survey of around 2,000 people. Economists expected confidence to drop, according to the median of 16 estimates in a Bloomberg survey.

New Hires

Retailers Rewe Group and Edeka Group plan to hire about 50,000 workers in Germany through 2013 as they open stores to win market share, according to press reports this month.

Still, the German economy is susceptible to swings in demand from key trading partners such as the U.S. and the U.K., which are now struggling to ward off a recession, the IAB said. Next year, the financial crisis will ``hit Europe harder than before and directly -- its impact will be felt in Germany.''

The International Monetary Fund predicts the world's advanced economies will expand 0.5 percent next year, the slowest pace since 1982. The U.S., British and German economies will stagnate, the IMF said in its World Economic Outlook.

According to the latest comparable data from the Organization of Economic Cooperation and Development, Germany's jobless rate was 7.2 percent in August. France, Germany's main trading partner, reported 8 percent unemployment compared with 4.1 percent in Japan and 6.1 percent in the U.S. The OECD average was 6 percent.

The prospect of slowing global growth creates scope for central banks to pare borrowing costs. The Federal Reserve lowered its benchmark interest rate to 1 percent yesterday and European Central Bank President Jean-Claude Trichet said Oct. 27 he may reduce interest rates next week, citing ebbing inflation and ``weakening demand.''

The ECB, Fed and four other central banks trimmed rates by a half point on Oct. 8 in an unprecedented coordinated move.

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