German Unemployment Falls to 10.6%

Germany's unemployment rate unexpectedly fell for a second month in June, but economists warned that Europe's largest economy was still far from recovery.

The number of people out of work fell by 33,000 last month, following labour market reforms and new measures to encourage people to seek work, the federal labour office reported.

June's drop followed a 10,000 decline in unemployment in May, revised from an originally reported fall of 4,000. The jobless rate fell to 10.6% in June from 10.7% in May.

However, economists were sceptical about any imminent recovery. "This is really a very positive surprise but unfortunately it has nothing to do with the economy," Ralph Solveen, an economist at Commerzbank, told Reuters.

"It's only a statistical effect because many people who used to be registered as unemployed are no longer included in the numbers. The labour market has not yet improved. We'll just have to wait until next year for that."

Gerhard Schröder, the German chancellor, has introduced economic reforms including tax cuts in a desperate bid to kick-start the economy.

Despite union opposition, the chancellor has introduced new legislation that threatens to strip benefits from the unemployed if they do not immediately register for job placement when they are made redundant.

The government has also started offering subsidies to people to become self-employed.

Germany, which makes up about a third of the eurozone's economy, is dragging down growth in the region as a whole.

Europe's economy stagnated in the first six months and there are "significant risks" to forecasts for a return to growth in the second half, according to the European commission.

Florian Gerster, the head of Germany's labour office, warned that the economy was still far from recovery despite today's surprising report.

Last week, German thinktank DIW warned that Germany may be slipping into recession despite government efforts to stimulate growth. Germany was in economic crisis, the research institute said in its summer report, cutting its forecast for German growth this year to -0.1% from a previous 0.6% rise.

The warning came after Mr Schröder announced tax cuts in an attempt to encourage consumer spending. Mr Schröder plans to bring forward tax cuts worth €16bn (£11bn) for consumers and small and medium-sized companies by a year to 2004. Opposition parties have said they support the plan.

In other straws in the wind for Mr Schröder, consumers grew more confident for a fourth month in June and the European Central Bank last month cut interest rates to 2%, their lowest level in more than 50 years.

Meanwhile, retail sales excluding cars and sales at petrol stations rose for the first time in three months in May, according to the Bundesbank, while executives became more optimistic last month, the Munich- based Ifo economic institute said last month.