Sharp drop in German unemployment (FT)

Unemployment in Europe’s largest economy registered its third-sharpest fall since the early 1990s in July, taking economists by surprise as Germany’s economic recovery was finally shaking up its long-depressed labour market.

“The figures are considerably better than expected, and that’s across the board,” said Elga Bartsch, economist at Morgan Stanley, after the Federal Labour Office said on Tuesday seasonally adjusted unemployment had dropped by 84,000 since June to 10.6 per cent of the active population.

The release is the latest in a sustained raft of positive economic news out of Germany, including a 0.8 per cent quarter-on-quarter rise in retail sales for the three months to July, the biggest in two years, as reported by the Federal Statistical Office this week.

While most economists now bank on growth of around 2 per cent this year, Germany will face formidable challenges in 2007, they warn, as reflected in weakening forward-looking confidence surveys.

Topping the list is the threat of a slow-down in the world economy and particularly the US, which would be a major setback for Germany’s export oriented industry.

Other adverse factors include political instability in the Middle-East, rising eurozone interest rates and a massive three-point rise in German value-added tax next January.

“I am bullish for this year. But the big question is about next year,” said Ms Bartsch. “The VAT rise will drag down growth next year, but on its own it will not derail the recovery. The biggest risk of all is the fate of the US economy.”

Concerns about the sustainability of the recovery could account for the remarkable rise in demand for temporary workers, as reported by temping agencies, although companies typically resort to temporary workers in the early phase of a recovery.

The heavy reliance on temporary staff is the most plausible explanation for a discrepancy between the improving job market statistics and corporate restructuring indicators, which show the number of lay-offs announced so far this year exceeding the 2005 figures.

Internationally comparable labour market figures released on Tuesday by the statistical office, which lag behind the Labour Office’s statistics by one month, showed a seasonally adjusted fall month-on-month fall in jobseekers of 60,000 in June and a 7.8 unemployment per cent rate.

The statistical agency also reported robust rises in both employment and vacancy figures in June and a marked improvement in the number of un-subsidised jobs, adding to the positive picture.
However, labour market data have been notoriously difficult to interpret lately because of numerous distortions. An unadjusted 12,000 fall in unemployment for July, the first since the 1970s, suggest the figures may have been boosted by the one-off effect of the football World Cup.

The later start to the German summer holiday season this year could also have affected the figures on the positive side, suggesting a possible correction in August.

■ Separately, Tuesday’s survey of European Purchasing Managers’ Index showed prices manufacturers in the Eurozone pay for raw materials and charge for their products grew fast in July than a month before, suggesting that the European Central Bank will raise rates on Thursday to stem inflation.

The data again highlights mounting price pressure despite the fact that orders booked by the 3,000 companies surveyed grew less strongly last month than the month before that.

The overall PMI slipped to 57.4 points in July from 57.7 in June, though the index remained well above the 50-point-marker to signal continued growth. The input price index rose to 73.5 from 71.5 points and the output price index to 57.3 from 56 points.

This suggests raw-material price rises are driving up manufacturing costs, which businesses are passing to consumers. The ECB is observing “strong vigilance” and economists expect it to raise rates by a quarter-point to 3 percent on Thursday.

Additional reporting by Gerrit Wiesmann in Frankfurt
Copyright The Financial Times Limited 2006