German unemployment rate rises with economic malaise

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Unemployment rate rises to 6.2% as companies shed jobs

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Germans vote in federal election on Feb. 23

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How to kickstart growth a key electoral issue

(Adds context, comments from labour minister and economists)

By Maria Martinez

BERLIN, Jan 31 (Reuters) - Germany's unemployment rate rose at the start of the year, despite a smaller than expected increase in the number of people out of work, as the weakness of Europe's biggest economy took its toll on the labour market.

The number of people out of work rose by a seasonally adjusted 11,000 in January to 2.88 million, less than the 14,000 increase analysts had forecast. However, the seasonally adjusted jobless rate rose to 6.2% - the highest in more than four years.

"The weak economic situation is now leaving visible traces on the German labour market," German Labour Minister Hubertus Heil said on Friday.

Disagreements among Germany's governing coalition over how to kickstart the sluggish economy contributed to the coalition's demise late last year, setting the stage for a snap election on Feb. 23, in which the economy is the top concern among voters.

With no sign of an imminent recovery, analysts expect the number of unemployed in Germany will exceed the 3 million mark this year for the first time in 10 years.

ECONOMIC GLOOM

Increasing competition from abroad, high energy costs, still elevated interest rates and uncertain economic prospects have taken a heavy toll on Germany's economy, which contracted in 2024 for the second year in a row.

Almost all branches of industry in Germany want to reduce their headcount, a survey from the country's influential Ifo institute showed on Thursday.

"The situation on the labour market remains tense," said Klaus Wohlrabe, head of surveys at Ifo. "There is still a tendency for companies to reduce their workforce."

There were 632,000 job openings in January, 66,000 fewer than a year ago, showing a slowdown in labour demand, the federal labour office said.

A separate survey from Germany's VDMA industry association on Friday showed one in four companies in the mechanical engineering sector planned to cut jobs in the next six months.

"The labour market figures are an alarm signal: the cyclical and structural weakness of the German economy is hitting the labour market with full force," said Rainer Dulger, president of the BDA employers' association.

He called the next government to reduce bureaucracy, reform non-wage labour costs and lower energy prices to put Germany "back on track for growth."

The dire situation is reflected in the country's storied auto industry, with Volkswagen and others cutting jobs as they try to stay afloat.

Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics, predicted unemployment claims could rise by 20,000 to 30,000 per month in the near term, pushing up Germany's unemployment rate to between 6.3% and 6.4% by the second quarter. (Reporting by Maria Martinez, Writing by Miranda Murray, Editing by Friederike Heine, Andrey Sychev and Christina Fincher)