German unemployment rose in December for the first time since February 2006, signalling an end to a three-year labour market boom as the global credit crisis hits companies in Europe's largest economy. Unemployment rose by a bigger-than-expected 18,000 in seasonally adjusted terms, the Federal Labour Office said on Wednesday, showing the recession in Europe's largest economy is hitting the labour market at the start of an election year.
A Reuters poll had pointed to a rise of 10,000. "The era of falling unemployment rates is now over for what will likely be quite some time," said Glenn Marci, economist at DZ Bank. "We certainly won't be seeing a positive turnaround in the rest of this year."
The jobless rise showed Europe had not "decoupled" from the economic slowdown and rising unemployment in the United States, said Audrey Childe-Freeman, senior currency strategist at Brown Brothers Harriman. "In turn, this can only reinforce the view that there is no decoupling when it comes to the interest rate cycle either.
"Whether it is January or February remains a close call (we remain in the January camp, but only just), but the ECB will have no option but cutting interest rates again and more than once, with rates likely to trough close to the 1 percent level." The ECB meets to discuss rates on January 15. Markets have priced in a 50 basis point cut from the current 2.5 percent, with some investors betting on a 75 basis point move after the last such reduction in December.
In a sign of how the fallout from the financial crisis is hitting German business, banking and real estate group Hypo Real Estate said last month it planned to cut about 40 percent of its total workforce to reduce costs. Hypo Real Estate is just one of many large corporations to cut jobs as the global downturn mounts.
The German jobless rise poses risks to Chancellor Angela Merkel's conservatives and her coalition partners, the Social Democrats, who will contest a federal election in September. The ruling coalition has presided over a steady fall in unemployment since the last election in 2005, but the foreign demand that has fuelled export-driven growth in the German economy since then is fading fast.
Germany fell into recession in the third quarter of last year and leading economic institutes have forecast the economy could contract by 2 percent or more in 2009 - which would be easily the worst annual performance in the post-war era.
To combat the recession, the government has agreed a 31-billion euro ($41.75 billion) stimulus programme and has held talks on a second package, which could total 50 billion euros and is likely to be finalised next week. "How steep the rise in unemployment will be hinges largely on what the government agrees to do in its second stimulus package," said Joerg Lueschow, economist at WestLB.
"A volume of 40 to 50 billion euros is certainly the minimum of what is needed," he added. February 2006 was the last time the adjusted unemployment figures showed a rise. However, this was a technical increase due to a change in the way jobless benefits were awarded.
The previous rise, caused by economic slowdown, was in March 2005, when unemployment hit a post-war high above 5 million, prompting Merkel's predecessor Gerhard Schroeder to call early elections, which he lost. The rise in unemployment in December meant the adjusted jobless total registered 3.181 million, good for an unemployment rate of 7.6 percent, the Office said.