German economic gloom deepens

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Economics Editor

The gloom hanging over the German economy deepened yesterday with the eighth successive monthly rise in unemployment. But new doubt was cast on the Bundesbank's scope to cut interest rates by separate figures showing faster growth in its monetary target.

Germany's unemployment total adjusted for normal seasonal variations increased by 26,000 to 3.99 million, a new post-war record, although the headline unadjusted figure fell to 4.14 million from 4.27 million the previous month. The seasonally adjusted unemployment rate was unchanged at 10.4 per cent. The only comfort was the fact that the March increase was lower than many economists had feared.

Bernhard Jagoda, head of the Federal Labor Office, said: "The German labour market started its spring recovery in March but it was limited." He blamed factors such as the unusually cold weather and early Easter holidays, saying the outlook for jobs was not as bleak as the mood of gloom implied.

However, some financial market analysts disagreed. "Firms are laying off, not hiring. They will not start to rehire until they once again feel confident that Germany is a good place to invest," said Holger Schmieding at the investment bank Merrill Lynch in Frankfurt.

Many forecasts predict rising joblessness throughout the year, even though growth is expected to pick up, because of underlying structural problems. The German economy is seen as over-regulated, with extremely high labour costs.

"Germany is going through what happened in the UK in the early 1980s," said Stephen King, an economist at the brokers James Capel. Part of the solution to the unemployment problem would be deregulation and the reduction of social security costs, he said.

Views on whether the Bundesbank would react to the bad news about the economy were mixed because of figures yesterday showing that growth of its M3 monetary target was higher than originally estimated. The money supply grew at an annualised rate of 12.8 per cent, up from a first estimate of 12.6 per cent, in February, compared with the final quarter of last year. The target for this year is 4-7 per cent.