Rule Change Aids German Job Figures

Wolfgang Clement, the German economy minister, warned yesterday that the eurozone's largest economy remained weak despite the biggest monthly fall in unemployment in five years.

The jobless rate fell to 10.2% last month from 10.4% in May. Government figures showed 85,000 fewer people out of work.

Mr Clement described the fall as an encouraging sign but said it was too soon to suggest the economy had turned the corner. "This shows that we are going in the right direction with our reform of the German labour market."

The drop in June was largely due to the government's tough new rules for benefit claimants, the head of the labour bureau admitted. Alarmed by the rise in unemployment to a post-war high of 4.257m, the left-of-centre government has introduced British-style rules cutting off benefits to those who refuse jobs.

"This fall is not due to firms going out there and hiring more workers," said Michael Hume of Lehman Brothers. "It really is about people being shoved off the unemployment register."

Mr Clement, who visited a jobcentre in south London last month, said the government had no choice but to press ahead with its reforms.

In June, factory output fell for the third month in a row, according to separate government figures, adding to fears that the economy has slipped back into recession.

Germany's economy shrank 0.2% in the first quarter and grew only 0.2% last year.

"The economy is not yet out of its deep slowdown ... We still have the highest level of unemployment since unification," said Klaus Zimmermann, president of the DIW economic think tank.

In an attempt to revive the economy, the government has proposed bringing forward €15.5bn of tax cuts, scheduled to take effect in 2005, by a year.

It has left open the question of how they will be financed, leading to fears that borrowing will rise sharply next year and bust the 3% of GDP limit set by the EU.