Germany's jobless rate drops to record low as economy booms

[MUNICH] Germany's unemployment rate fell to a record low as the number of people out of work slid for a sixth month, reflecting a boom in Europe's largest economy that could push up wages and inflation.

The jobless rate was 5.5 per cent in December, and the previous month's rate was revised down to the same level, the Federal Labor Agency in Nuremberg said on Wednesday. The number of unemployed plunged by 29,000 last month, more than twice as much as the median estimate in a Bloomberg survey of economists.

Germany has been enjoying a strong economic run supported by domestic spending and solid global trade, with Purchasing Managers' Indexes on Tuesday showing factory activity for the country and the euro area jumping to records in December. At the same time, business optimism has slipped from an all-time high as corporate executives fret over production constraints such as finding skilled workers that may start to lift their costs.

"People are not afraid to spend money because unemployment is so low and that boosts domestic demand," said Jens Kramer, an economist at NordLB in Hanover. "It's something of a miracle that wage growth was so moderate after we effectively had full employment for two years in Germany. We should eventually see pressure for higher wages this year."

In a sign of that pressure, pay talks between employers and IG Metall, Germany's 2.3 million-member industrial union, appear to be struggling to make progress after an initial deadline to reach an agreement passed on Dec 31. IG Metall has asked for a 6 per cent increase in wages and the option to work just 28 hours a week.

Weak pay growth so far means the nation is facing the same struggle as the rest of the euro area in generating sustained inflation. Bundesbank President Jens Weidmann, who has repeatedly called for the European Central Bank to set an end-date for its crisis-era stimulus measures, said last month that he's confident the picture in Germany will soon change.

"We expect that the increased capacity utilization and regionally appearing bottlenecks in some labor markets will lead to somewhat higher wage pressure," he told reporters on Dec 18. Nascent pressures elsewhere in the bloc mean that the ECB is "therefore on track toward our definition of price stability."

That reasoning was bolstered earlier on Wednesday as data showed Spanish jobless claims slid by 61,500 last month, the biggest decline since June and snapping a run of four months of increases.

BLOOMBERG