Germany suffers worst quarterly job loss since 1990

Germany suffered its worst quarterly job loss since being reunified in 1990, official figures showed today.

In the three months to the end of June, total employment shrank by 646,000 to 38.07 million, the federal statistics office reported.

The manufacturing sector shed 267,000 jobs - a 3.2% rise from a year ago - while employment in the construction industry fell by 149,000, or 6.1%.

The dismal figures starkly underlined Germany's grim economic state. Once Europe's powerhouse, it is now the continent's sick man. Data last week showed that the country had slipped into its second recession in two years.

In less downbeat news, a key German sentiment indicator rose for the eighth month in a row in August, increasing by more than had been expected.

The Zew economic institute said that its indicator jumped by 10.6 points to 52.5, from 41.9 in July, beating analyst expectations.

However, Germany's central bank, the Bundesbank, has expressed caution about recent encouraging surveys.

"Surveys point to a brightening of sentiment in Germany and financial markets have ... become more confident, but these hopes have so far not manifested themselves in hard data," the bank said in its August report yesterday.

HSBC bank shared the Bundesbank's analysis. In a recent briefing note, analysts said: "While the latest survey information does point to an improvement in the German economy during the third quarter, it does not indicate that a robust and sustainable recovery is under way.

"The current situation is probably best described as looking less bad than it was in the first half of the year."

There have been signs that Germany's jobless rate has stabilised. For the three months to July, unemployment fell by 36,000, following an increase of 150,000 in the previous three months.

However, the drop in the jobless numbers almost certainly reflected government measures to discourage people from signing for unemployment benefits, rather than an underlying improvement in the economy.

The German government has brought forward tax cuts and introduced changes to the labour market in a desperate bid to revive the economy. The chancellor, Gerhard Schröder, has proposed reducing unemployment benefits and cutting their duration.

But whatever headway he makes in the way of reform, Germany faces a double whammy. Under the EU's growth and stability pact, eurozone countries have to keep budget deficits to 3% of gross domestic product.

Germany, therefore, cannot spend itself out of trouble, unlike the US, where a combination of tax cuts and higher public spending has created big budget deficits.

The unwillingness of the European Central Bank to slash interest rates is another constraint on growth in Germany, as well as in other eurozone countries.