UPDATE 1-German jobless at lowest level in two decades

* Data takes sting out of unexpected retail sales drop

* Inflation seen curbing consumption despite jobs gains

* German economy still heavily reliant on exports

(Adds quotes, retail sales data, background)

By Noah Barkin

BERLIN, March 31 (Reuters) – German unemployment fell
sharply for a second straight month in March, pushing the
jobless rate down to 7.1 percent, its lowest level since figures
for a unified Germany were first published two decades ago.

In a sign that demand for labour remains robust in Europe’s
largest economy, the Federal Labour Office said unemployment
fell by 55,000 in March after a drop of 54,000 in February.

The decline, which was helped by mild weather conditions,
brought the overall unemployment total to 3.005 million, and
took the sting out of an unexpected drop in retail sales for
February which economists said was linked to rising inflation.

“It is obvious that German consumers will not engage in a
spending spree,” said Carsten Brzeski at ING Financial Markets.

“However, with pent-up demand over the last years, strong
economic prospects, more people at work and higher wages, the
fundamentals for decent consumption boom in Germany have hardly
been better since reunification.”
Labour Office head Frank-Juergen Weise said demand for
labour was “high” and that growth in full-benefits paying jobs
was continuing. Economists polled by Reuters last week had
expected unemployment to fall by 25,000 and the rate to come in
at 7.2 percent.

The German government used a number of job boosting schemes,
including “Kurzarbeit” subsidies, to cushion the blow from a
record contraction in gross domestic product (GDP) in 2009.

The measures helped the German labour market outperform its
peers in Europe at the height of the global financial crisis and
the economy has gone from strength to strength since.

Still, a strong increase in low wage jobs and rising
inflation driven by high energy prices have prevented private
consumption from taking off in the way some economists were
predicting in 2010, leaving the German economy highly dependent
on export growth.

TEMPORARY DAMPER

“We have to be a little bit cautious,” said Peter Meister at
BHF Bank. “Germany is a very export-oriented economy so there is
a possibility that growth could lose a little momentum because
of events in Japan and delivery difficulties caused by the
nuclear crisis. But that should only be a temporary damper.”

Data from the Federal Statistics Office showed an unexpected
0.3 percent drop in real retail sales for the month of February
in a sign rising prices, driven by high oil, may be tempering
consumer demand.

Annual inflation in Germany has pushed up to 2.2 percent,
when harmonised according to EU standards, and consumer prices
in the broader 17-nation euro zone jumped 2.6 percent in March
compared to the year before, data on Thursday showed.
[ID:nBRLVEE7CQ]

The European Central Bank is expected to respond to rising
price risks next week by raising its benchmark interest rate
from a record low 1.0 percent.

The threat of inflation contributed to the first drop in 10
months in the GfK market research group’s measure of German
consumer sentiment earlier this week.

On Thursday, the HDE retail association said it was sticking
with its forecast for sales to rise by 1.5 percent on a nominal
basis this year, but said risks to its projection were rising.

Last week, Metro AG (MEOG.DE: Quote, Profile, Research), the world’s number four
retailer, said unrest in North Africa and the Japanese nuclear
crisis had raised the threat of a deterioration in the economic
environment. The unrest has contributed to a rise in oil prices
(LCOc1: Quote, Profile, Research) to over $116 per barrel.

(Reporting by Noah Barkin, Brian Rohan, Stephen Brown and
Holger Hansen in Berlin, Jens Hack in Nuremberg; editing by
Patrick Graham)

UPDATE 1-German jobless at lowest level in two decades