Germany's robust labour market brushes off Brexit fears

By Joseph Nasr

BERLIN (Reuters) - German jobless numbers fell more than expected in August, posting their 12th consecutive monthly fall and reaffirming the strength of a labour market that has fuelled private consumption and turned it into a main pillar of growth.

The drop allays fears that June's Brexit vote and global uncertainty could impact Europe's largest economy, which grew in the first two quarters by 0.7 and 0.4 percent respectively, cementing its role as the growth engine of the euro zone.

German retail sales data meanwhile showed the sector grew by 1.7 percent in real terms from January to July compared with the same period last year, supporting expectations that private consumption will cushion external shocks. These include Britain's June 23 vote to leave the European Union.

"The Brexit vote has had no damaging effect on the resilient German labour market," said KfW Bank economist Joerg Zeuner.

But some economists still expect the shock referendum result to have an impact on the German economy in the coming months.

The DIW economic institute said growth would slow to 0.3 percent in the third quarter, partly because of Brexit.

"Growth will continue to be driven by private consumption, but this is expected to lose momentum," said DIW economist Simon Junker.

The seasonally adjusted jobless total fell by 7,000 to 2.675 million, the Labour Office said. That compared with a consensus forecast in a Reuters poll for unemployment to fall by 5,000.

The adjusted unemployment rate remained at 6.1 percent, the lowest level since German reunification in 1990.

That compares with jobless rates of 10.1 percent in the euro zone and 11.4 percent in Italy, whose economy stagnated in the second quarter according to preliminary figures. Economic growth in the euro zone slowed to 0.3 percent in the second quarter.

ALL EYES ON ECB

Spurring growth and inflation have been daunting challenges for the European Central Bank, which is facing calls to further expand its extraordinary stimulus.

Its record-low interest rates and bond-buying programmes have benefited the German economy, economists say, as cheap money is encouraging traditionally frugal Germans to spend.

But the effects of its expansive monetary policy have failed to trickle down to the rest of the euro zone, mainly southern countries like Italy, Spain and Greece. The bank has also missed its near-2-percent inflation target for three years.

The euro zone's annual inflation rate was unchanged at 0.2 percent in August, coming in weaker than expected, data showed on Wednesday. German annual inflation slowed to 0.3 percent from 0.4 percent in July despite the economic upswing.

The euro zone's central bank is now facing growing calls to act again when it meets on Sept. 8 or soon afterwards although some economists believe the ECB has little firepower left.

"There is a strong case for the ECB to announce further policy easing," Stephen Brown of Capital Economics said. "This could come as soon as the Bank's meeting next week."

ING economist Bert Colijn said the fact that core euro zone inflation was now lower than it was a year ago will be "alarming" to ECB governing council members, but they were unlikely to take action.

French central bank chief Francois Villeroy de Galhau said on Wednesday that the ECB should stick to its current monetary policy when it holds its rate-setting meeting next week.

"Negative interest rates are useful but they are just one among many instruments and have their limits," Villeroy, who also sits on the ECB's rate-setting Governing Council, said.

"This is why we have to stick to the current monetary policy. And yes, we're doing so sustainably."

(Additional reporting by Michael Nienaber in Berlin, Balazs Koranyi in Frankfurt, Gavin Jones in Rome; Editing by Catherine Evans)