German unemployment rises

Schroeder: High unemployment could hurt his chances of re-election

BERLIN, Germany -- The number of people out of work in Germany rose more than expected last month, pointing to a weak labour market that could slow the recovery of Europe's biggest economy.

Unemployment rose by 60,000 on a seasonally adjusted basis in May, bringing the total jobless number to 4.042 million, the Federal Labour Office said on Friday.

However, the adjusted unemployment rate slipped to 9.5 percent in May, compared with 9.7 percent in the previous month, the office said.

The 60,000 jump in the adjusted figure took most analysts by surprise. Forecasts had called for a rise of between 5,000 and 11,000, with a total adjusted unemployment level of around 3.974 million.

"It is way ahead of expectations and raises questions about a German recovery," Jeremy Hawkins, an economist at the Bank of America in London, told CNN.

On an unadjusted basis, the number of unemployed workers fell to 3.946 million in May, below the politically sensitive 4 million level.

The economy has been the centre piece of Chancellor Gerhard Schroeder's campaign in the September national election. He came to power on a pledge to reduce unemployment and has been looking for signs of an improved labour market to boost his chances of re-election.

"Chancellor Schroeder may point to the unadjusted figure that was below the psychological 4 million figure but for the markets what counts is the adjusted figure and the signal is that the labour market remains very weak," Ulla Kochwasser, and analyst at Mizuho Corporate Bank in Frankfurt, told Reuters.

"It could have something to do with the weakness in the construction sector which has a very bad month in May."

The German economy is also facing the threat of higher inflation.

Economists are concerned the current round of wage negotiations could put more pressure on prices and increase the cost of doing business. That, in turn, could results in more company cutbacks and layoff -- further aggravating the unemployment situation.

The IG Metall engineering union recently won a 4 percent pay rise and other unions are demanding parity or higher, and in some case as much as a 6.5 percent increase.

The European Central Bank, which decided on Thursday to keep interest rates on hold, could still hike rates in the coming months if inflation rises too far above its 2 percent target.