German Unemployment Unexpectedly Declined in October

By Rainer Buergin and Gabi Thesing

Oct. 29 (Bloomberg) -- German unemployment unexpectedly fell in October, adding to signs of an economic recovery and easing pressure on Chancellor Angela Merkel as she begins her second term in office.

The number of people out of work fell a seasonally adjusted 26,000 to 3.43 million, the Nuremberg-based Federal Labor Agency said today. Frank-Juergen Weise, the agency’s head, said government measures including short-time work with incentives to hold on to staff are helping to keep unemployment down.

“The figures show that companies are trying hard to shed as few jobs as possible, which is good because it underpins consumer spending,” said HSBC Trinkaus economist Lothar Hessler, the only analyst among 30 to predict the jobless decline. While unemployment may not rise as much as has been expected, “a worsening labor market is only a matter of time.”

Merkel, who was sworn in for a second term yesterday, said she expects the worst economic crisis in seven decades to “strongly affect” Germany through 2011, pushing up unemployment. She has pledged tax cuts worth 24 billion euros ($35 billion) even as the budget deficit widens, in a bid to shore up growth in Europe’s largest economy.

While the jobless figures are encouraging, “it is probably too soon to call the end of the labor market downturn,” Jennifer McKeown, an economist at Capital Economists Ltd. in London, said in a note, citing the expiry of short-term work subsidies. Still, “signs of improvement” in the labor market that potentially boost consumer spending “support our view that Germany will lead the euro-zone economic recovery over the coming quarters.”

Economist Forecasts

Economists had forecast that unemployment would increase by 15,000 in October, according to the median of 30 estimates in a Bloomberg News survey. The jobless rate slipped to 8.1 percent from 8.2 percent the previous month, today’s report showed.

Statistical changes that held down unemployment in the past three months had little effect in October: the drop would still have been 20,000 without the changes, the labor agency said.

“In view of the overall economic situation, this is a surprisingly favorable development,” Weise said.

While Germany’s economy unexpectedly returned to growth in the second quarter, the recovery remains fragile. Consumer confidence fell for the first time in more than a year, a report by GfK AG showed this week, and retail sales unexpectedly dropped in August, the Federal Statistics Office said Oct. 1.

Spend Don’t Save

Merkel is standing by her plan for tax cuts even as the budget deficit swells to a record, telling a convention of her Christian Democratic Union on Oct. 26 that the coalition “decided to go down a road that relies fully on growth.” While there’s no guarantee that this strategy will work, Merkel said it will certainly fail “if all we do is save, save, save.”

That attracted criticism from officials including Luxembourg Prime Minister Jean-Claude Juncker -- a candidate for the post of European Union president -- who told the Handelsblatt newspaper the coalition isn’t putting enough emphasis on controlling the budget gap.

Germany’s federal government, the states, cities and special funds will post a shortfall of around 133 billion euros next year, compared with 7.4 billion euros in 2008, medium-term budget plans show. Germany will violate an EU rule that limits the overall deficit to 3 percent of gross domestic product at least through 2012, the plan shows.

Merkel’s last government provided 85 billion euros worth of economic stimulus that included subsidies to persuade companies to keep workers on shortened shifts when orders are slack.

According to the latest comparable figures published by the Organization for Economic Cooperation and Development, Germany’s jobless rate rose to 7.7 percent in August from a 2008 average of 7.3 percent. The unemployment rate was 9.9 percent in France and 9.6 percent in the U.S.

In western Germany, the number of people out of work fell by a seasonally adjusted 16,000 in October, while the number in eastern Germany declined 10,000.

To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Gabi Thesing in Frankfurt at gthesing@bloomberg.net.