German unemployment rises faster than expected in May

The number of people out of work in Germany rose at a faster pace than expected in May, labour office figures showed on Wednesday, putting pressure on a new government battling to wrench Europe’s largest economy from a prolonged downturn.

The office said the number of unemployed increased by 34,000 in seasonally adjusted terms to 2.96 million. Analysts polled by Reuters had expected a rise of 10,000.

The number of unemployed people in Germany is approaching the 3 million mark for the first time in a decade.

“The current labour market figures show that we urgently need economic policy impulses that create growth,” German Labour Minister Baerbel Bas said.

Economic malaise has put pressure on the job market even against a backdrop of long-term labour shortages, adding to pressure on conservative Chancellor Friedrich Merz, who has vowed to pull the economy out of a two-year decline.

Tariffs announced by US President Donald Trump could deal a major blow to those efforts - possibly putting the German economy on track for a third straight year of recession for the first time in the country’s post-war history.

Hiring intentions in the service sector, however, offer a rare bright spot, said Marc Schattenberg, economist at Deutsche Bank.

“Especially if the trade conflict between the US and the EU is resolved soon, the German economy could grow slightly again this year,” Schattenberg said. “That would finally give the labour market more tailwind.”

The seasonally adjusted employment rate remained unchanged in May from the previous month at 6.3%, in line with a forecast by analysts in a Reuters poll. Excluding the pandemic, this is the highest level since December 2015.

Pantheon Macroeconomics forecasts that the German unemployment rate will climb to closer to 6.5% over the coming months.

“The labour market is not getting the tailwind it needs for a trend reversal. Therefore, we expect unemployment figures to continue to rise in the summer,” said labour office head Andrea Nahles.

There were 634,000 job openings in May, or 67,000 fewer than a year ago, showing a slowdown in labour demand, the labour office said.

Meanwhile the German economy is expected to contract by 0.3 per cent this year, shrinking for a third consecutive year, the German Chamber of Commerce and Industry (DIHK) said on Tuesday, forecasting the longest period of weakness in Germany’s post-war history.

The risk of recession persists, the DIHK said, but following a promising first quarter, its projection was more optimistic than the previously forecast 0.5 per cent contraction published in February.

Economic growth in the first quarter was significantly stronger-than-expected due to export and industry frontloading ahead of US tariffs.

Germany had been expected to be badly affected by tariffs due to its export-oriented economy. The US was Germany’s biggest trading partner in 2024 with two-way goods trade totalling 253 billion euros ($288.02 billion).

The DIHK forecasts German exports to decline by 2.5% in 2025, also contracting for a third consecutive year.

A DIHK survey, conducted among 23,000 companies from all sectors and regions, showed that 29% of them see exports falling over the next 12 months, while only 19% expect exports to rise.

The German economy continues to struggle with pessimistic business sentiment, standing at 94.9 in the latest survey. Values under 100 mean that there are more pessimists than optimists.

“Businesses are still waiting for signals of progress,” DIHK managing director Helena Melnikov said, calling for urgent political action. “Positive impulses for the economy must come quickly, before the summer break, businesses are waiting for them,” she said.

Melnikov added that because the survey took place between the end of March and the end of April - before the new government was in office - it would serve as a basis to interpret businesses’ response to the coalition’s early economic measures.

Reviving sluggish growth will be one of the main tasks of the coalition of conservatives and Social Democrats.

Economic policy conditions were identified as the largest business risk, with 59% of companies citing them as a major obstacle. High labour costs and domestic demand also pose significant challenges, the survey showed.

Nearly one-third of companies planned to reduce investments.

The German government on Wednesday proposed a law to extend rent controls in an effort to make housing more affordable, following through on a key pledge of the new coalition government under Chancellor Friedrich Merz.

The measure, which extends the price controls by another four years through 2029, is fiercely opposed by property industry executives.

Reuters