German output declines
August 7, 2001 Posted: 1434 GMT
LONDON (CNN) -- German industrial output fell less than expected and unemployment figures came in below forecasts, reducing prospects of a euro zone rate cut.
Industrial production in Europe's largest economy fell 0.4 percent in June after a 0.9 percent rise in May, but the drop was less than the 0.7 percent forecast in a Reuters survey.
Ouput in June was up 1.1 percent from a year earlier.
"We thought it would probably be a sharper fall" in industrial production, Sarah Hewin, senior economist at American Express, told Reuters. "Construction is especially weak and manufacturing is continuing to decline. So although the numbers are not quite as weak as expected, the picture is still on the weak side."
 | VIDEO | Germany's unemployment rises
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Earlier Tuesday, Germany's Federal Labour Office said seasonally adjusted unemployment rose to 3.86 million in July, up 11,000 from June, the seventh successive rise. The nationwide jobless rate was unchanged at 9.3 percent.
The increase in unemployment was less than the 20,000 rise forecast by analysts polled by Reuters.
The latest figures cloud the outlook for interest rates in the euro currency zone. The chances of a rate cut to stave off economic slowdown seemed to increase on Monday after a report showing a fall in German manufacturing orders.
ECB holds rates steady
The euro zone central bank left its benchmark rate unchanged at 4.50 percent at its most recent policy meeting last week. The ECB next meets on August 30, but may hold off on a cut yet again.
On an unadjusted basis, the German jobless total rose 104,000 in the month to 3.79 million.
The figures were announced as chemical giant BASF became the latest German company to announce job cuts. It said on Tuesday 4,000 jobs would go as the slowdown bit into profit.
"It's a combination of the manufacturing cycle and exposure to global trade that is really doing the damage," economnist David Thwaites of BNP Paribas told CNN. "That's really hitting the German market and the German economy."
Germany is particularly vulnerable to the global downturn because of its heavy reliance on the ailing manufacturing sector. This accounts for almost a quarter of the German economy – in Britain and France it's less than 20 percent.
German manufacturers are not only seeing export orders dry up, but also a downturn in domestic demand.
"We've seen higher inflation in the course of this year than perhaps was anticipated last year when wage deals were negotiated," said Commerzbank's Peter Dixon. "Consequently that's eroded household purchasing power, and we've actually seen very sluggish consumer demand - which has been a big surprise."
Economists predict that German economy shrank in the second quarter of this year and say that might continue in th thirds quarter, with an improvement coming at the earliest by year-end.
"The economic slowdown is continuing to have a strong impact on the labour market," Federal Labour Office President Bernhard Jagoda said as he reiterated that unemployment would average 3.7 million in 2001.
He said, however, that the labour market would require a "strong autumn upturn" to have a realistic chance of meeting that goal.
Sonia Sequeira contributed to this report
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