The Financial Times on Germany 2

The Financial Times on Germany 2

‘Extraordinary’ fall in German jobless

By Bertrand Benoit in Berlin

Published: January 3 2007 11:25 | Last updated: January 3 2007 11:25

Unemployment in Germany recorded another steep monthly drop in December, underscoring the robustness of the year-old rebound under way in Europe’s largest economy.

Seasonally adjusted figures released by the Federal Labour Agency on Wednesday put the number of jobseekers in Germany at 4.1m, down 108,000 on the month, a far bigger drop than economists had anticipated after a 86,000 fall in November.

The “extraordinary fall in unemployment”, as described by the Agency, put the unemployment rate in the country at 9.8 per cent.

“These figures are considerably better than expected and underpin the view that the recovery in Germany has become self-sustaining,” Elga Bartsch, economist at Morgan Stanley, said.

The data, following very upbeat business sentiment surveys at the end of December, will buttress the view shared by a majority of economists that the strong German recovery will last well into 2007 despite a three-point rise in value-added tax, the biggest tax increase in post-war history, this month.

The closely followed Ifo business sentiment index surged to a 16-year high last month after notching up the fastest growth last year since the start of the decade. The German economy is expected to have grown by 2.5 per cent in 2006, exceeding French growth for the first time since 1994.

“The positive development in unemployment is mainly down to the cyclical rebound in job creation,” the Labour Agency wrote in its monthly report.

However, economists said several factors, including mild weather in December and new benefits available to unoccupied construction workers as of December 1st, might have flattered the unemployment figures somewhat.

In November, the latest month for which employment data was available, the Agency recorded 46,000 job creations, bringing the total number of positions created in the past year close to half a million.

The main question for economists regarding the fate of the German recovery this year hinges on consumers’ reaction to the VAT increase and the magnitude and duration of the expected lull in growth this hefty tax increase could cause.

Anecdotal evidence of robust retail sales over the holiday season, and the positive sentiment evidenced in the retail sub-section of December’s Ifo index, suggest consumption picked up at the end of 2006.

However, private spending remains low and some forecasters fear consumers might have brought forward big-ticket purchases in anticipation to the VAT rise, pointing to a possible drop in spending in the first quarter even though the tax increase may take longer to find its way into higher retail prices.