Berlin, Feb. 5 (Bloomberg) -- German unemployment rose to a 4 1/2-year high in January, increasing the risk that Europe's largest economy will slide into its second recession in two years. The number of people out of work increased a seasonally adjusted 62,000 from December to 4.27 million, the Federal Labor Office said. The unemployment rate climbed to 10.3 percent from 10.1 percent, the Bundesbank said. ``There are no signs of a rebound in our business,'' said Ferdinand Graf von Ballestrem, chief financial officer of MAN AG, Germany's No. 2 truckmaker. The company last year shed 6,000 jobs as demand for its vehicles weakened. Germany's economy may have shrunk last quarter as companies spent less on equipment and fired workers, Bundesbank Vice President Juergen Stark said. Unemployment is eroding the confidence of consumers, whose spending accounts for about 60 percent of the economy. Retail sales fell 2.3 percent last year. Germany, which makes up for a third of the economy of the dozen countries sharing the euro, is dragging down the region. European banks, airlines and other service companies grew more slowly in January as consumers and businesses reined in spending, an index based on a survey of 2,000 purchasing managers showed. The German index fell to a record low. Commerzbank AG, Germany's fourth-largest lender, is shedding 4,300 jobs, or 11 percent of the workforce. Another 3,000 positions may go as Chief Executive Officer Klaus-Peter Mueller tries to stem losses, union officials say.
`Verge of Recession'
``We're on the verge of another recession -- the risk that Germany will slide back is growing rapidly,'' said Eva Vorbauer, who helps manage 10 billion euros ($10.9 billion) at HSBC Trinkaus Capital Management in Dusseldorf. ``Why should companies even consider hiring when the government is doing its best to drive investment out of the country?'' Chancellor Gerhard Schroeder's Social Democratic Party scored its worst results since World War II in two regional elections on Feb. 2 as voters showed their dissatisfaction with rising unemployment and tax increases. In Lower Saxony, Schroeder's home state, the SPD was voted out after 12 years in power. The government last week lowered its forecast for economic growth this year to 1 percent, after the slowest pace of expansion in nine years in 2002. Germany's benchmark DAX Index is down 8.9 percent this year and shed 44 percent in 2002, the biggest drop among the world's benchmark indexes tracked by Bloomberg. The index fell 0.5 percent to 2620.46 at 11:26 a.m. in Frankfurt.
Swatch Sales
Swatch Group AG, the world's biggest watchmaker, said second- half sales slid 1.9 percent as mounting unemployment and rising taxes trimmed demand in markets including Germany. The country's six leading economic institutes have all reduced their outlook for growth this year to 1 percent or less. That's ``still too optimistic,'' said Eckhardt Wohlers, an economist at the Hamburg-based HWWA institute, one of the six, who expects the economy to expand 0.7 percent. Schroeder is counting on foreign demand to boost growth. Exports, which account for about a third of gross domestic product, may rise 4.5 percent this year, after gaining 2.9 percent last year, Clement's ministry said in a report. German business confidence rose in January for the first time in eight months. The Ifo institute, which polls 7,000 companies, said its index of western German business confidence rose to 87.4 from 87.3. Institutional investor confidence also improved, a report by the Mannheim-based ZEW institute showed.
No `Quick Victory'
Still, ``nobody should cherish the illusion that a quick victory is possible in the fight against unemployment,'' said Wolfgang Franz, president of the ZEW, who was last week appointed a member of the government's council of economic advisers. January's jobless increase was twice as big as economists forecast. Adjusted for European Union standards, the jobless rate rose to 8.6 percent, above the December average of 8.5 percent for the 12 countries sharing the euro. The U.S. unemployment rate probably held at an eight-year high of 6 percent in January, economists said. ``First signs of an economic stabilization aren't having an effect on the labor market yet,'' Labor Office President Florian Gerster said. ``We expect that in the second half of the year an improving economy will reach the labor market.''
Firing Laws
The government has passed a series of measures, including setting up private temporary job agencies, to encourage the unemployed back to work. Economics Minister Wolfgang Clement has said he favors loosening rules for firing employees of small companies, a step opposed by Germany's labor unions. ``The government had to accept massive criticism at the end of last year,'' said Eugen Haegele, who helps manage 10 billion euros at SuedKA in Frankfurt. ``Maybe they've engaged in some serious soul-searching and are more willing to tackle necessary reforms.'' The European Central Bank may help spur growth by lowering interest rates, comments by policy makers suggest. Council member Matti Vanhala said the bank should have ``an open mind'' as the economy is ``much more sluggish'' than expected. The ECB, which sets borrowing costs for the dozen nations using the euro, in December trimmed interest rates for the first time in more than a year, by half a point to 2.75 percent. Policy makers next meet to set rates tomorrow.
Iraq Threat
Unemployment and a possible war in Iraq ``are likely to seriously constrain consumer spending and any recovery in the German economy,'' said Jason Simpson, a government bond strategist at ABN Amro in London. That may ``encourage the ECB that easier monetary policy is needed.'' The number of people out of work in western Germany, which accounts for 94 percent of national output, rose a seasonally adjusted 46,000, the Labor Office said. The number of people out of work in eastern Germany rose 16,000. The number of people out of work, unadjusted for seasonal factors, climbed to 4.62 million. In November, employment fell a seasonally adjusted 43,000, the Labor Office said. //www.quote.bloomberg.com