/www.bloomberg.com/ By Andreas Cremer
Berlin, (Bloomberg) -- German unemployment rose to a 4 1/2-year high in December, adding to evidence Europe's largest economy may have contracted last quarter.
The number of people out of work rose a seasonally adjusted 28,000 from November to 4.2 million, the highest since July 1998, the Federal Labor Office said. The jobless rate climbed to 10.1 percent from 10 percent, the Bundesbank said.
Germany may sink into its second recession in two years, as rising taxes and social security payments prompt companies and consumers to lower spending, Morgan Stanley predicts. Metro Group, Europe's third-largest retailer, said fourth-quarter sales growth slowed as shoppers in its German home market spent less.
``What, other than shedding jobs to cut costs, would you suggest we do in this environment?'' asked Herbert Schirmer, executive director of DruckMedia GmbH, a Cologne-based maker of printing plates. The company plans to pare its workforce of 120 by a fifth before the end of the year.
Siemens AG, Germany's No. 1 electronics and engineering company, plans to cut 970 jobs at the Munich headquarters of its fixed-line phone division, the company said this week. The cuts are part of 2,300 reductions already announced.
``In the next few months we will see unpleasant jobless figures,'' Florian Gerster, head of Germany's Labor Office, told reporters. ``The high cost of labor makes employment expensive and weakens demand for workers.''
Slumping Stocks
Germany's benchmark DAX index fell 0.7 percent, or 20.11 points to 2972.89 at 3:08 p.m. in Frankfurt, erasing earlier gains. The index was Europe's worst performing national benchmark last year, losing 44 percent of its value.
Chancellor Gerhard Schroeder's popularity has plunged as faltering growth and rising joblessness force his government to boost taxes to cover budget shortfalls. His Social Democrats may lose power in Schroeder's home state of Lower Saxony in a Feb. 2 election after ruling for 12 years, a poll showed yesterday.
Schroeder faces the risk of strikes by government workers demanding more pay. Public employers are wrangling with Ver.di, Europe's largest union, over the wages of workers from bus drivers to nurses who say they may strike as early as next week if talks collapse today.
All the country's six leading economic institutes have reduced their outlook for growth this year to 1 percent or less, lower than the government's forecast of 1.5 percent. Coalition lawmakers said the government will lower its forecast in its annual economic report, due on Jan. 29.
Economy `Grim'
``The economy is in a grim state, companies have no inclination to hire and the government should pay heed to that,'' said Eva Vorbauer, who helps manage 10 billion euros ($10.4 billion) at HSBC Trinkaus Capital Management in Dusseldorf.
Adjusted for European Union standards, Germany's jobless rate climbed to 8.5 percent in December from 8.4 percent the previous month, above the average of 8.4 percent in November for the dozen countries sharing the euro.
The U.S. unemployment rate probably held at an eight-year high of 6 percent in December, economists said in advance of a government report Friday. The number of U.S. workers filing new claims for state unemployment benefits fell below 400,000 for the second time in the past three weeks, a sign the worst stretch of job losses may have passed, a report today showed.
Europe's economy may contract in the first quarter after a worse-than-expected fourth quarter amid falling consumer confidence and car sales, the European Commission said today.
European consumers were more pessimistic than at any time in the past 5 1/2 years last month as unemployment rose and concern grew about a possible war in Iraq. Germany's Douglas Holding AG, Europe's biggest cosmetics retailer, said fourth-quarter sales fell 3.9 percent on lower demand for jewelry.
Interest Rates
Almost half Germany's small and medium-sized companies plan to shed more jobs because they don't expect conditions to improve, a survey by the UMU association of small and medium-sized businesses showed yesterday.
To spur the economy, the European Central Bank lowered interest rates for the first time in more than a year in December. The bank reduced its benchmark refinancing rate by half a percentage point to 2.75 percent.
Policy makers left interest rates unchanged at today's meeting. Fourteen out of 25 economists said the bank will keep interest rates at a three-year low until the end of the year -- or cut them further.
``We do expect very moderate growth and a slow resumption of growth throughout the year,'' ECB President told a press conference after today's rate decision. ``We judge the current monetary policy stance as appropriate.''
The adjusted jobless total in western Germany rose to 2.75 million in December, from 2.73 million. In the eastern states, the jobless total, adjusted for seasonal swings, reached 1.45 million, compared with 1.44 million in November. German employment fell 26,000 in October, the Labor Office said.