July 1 (Bloomberg) -- Germany's unemployment rate declined to the lowest level in almost 16 years in June, as Europe's largest economy resists a global slowdown.

The number of people out of work, adjusted for seasonal swings, fell 38,000 from May to 3.27 million, the Nuremberg-based Federal Labor Agency said today. Economists expected a drop of 14,000 in June, according to the median of a Bloomberg News survey of 38 forecasts. The adjusted unemployment rate dropped from 7.9 percent in May to 7.8 percent, the lowest since August 1992.

``With annual growth above 1.3 percent, companies are still hiring,'' said Thorsten Polleit, chief German economist at Barclays Capital in Frankfurt. ``We're not facing an abrupt end to employment growth, but maybe a moderation. It's possible that the jobless rate will even decline further.''

Forward-looking economic reports such as the Ifo institute's business confidence measure and manufacturing orders indicate that German growth is set to slow. While unemployment rose last month for the first time in more than two years, overall companies are still working off order backlogs and export sales, which rose more in April than economists expected, are still providing support.

`Positive Trend'

``We had a few doubts in May because there was an increase,'' Frank-Juergen Weise, the head of the Labor Agency, said in an interview on Bloomberg Television. ``But the positive trend for this year is unbroken from our point of view.''

The median of five forecasts published by economic institutes last month suggests the economy will expand 2.2 percent this year before slowing to growth of 1 percent next. The economy may have shrunk in the second quarter after expanding 1.5 percent in the first three months, the strongest rate in 12 years, Deputy Economy Minister Walther Otremba said June 24.

``The German economy had a very good start into 2009,'' said Eckhart Tuchtfeld, an economist at Commerzbank AG in Frankfurt. Even so, Tuchtfeld said he's ``not as convinced anymore that the positive economic development will boost employment.''

Siemens AG, Europe's biggest engineering company, plans to eliminate 6,400 jobs in Germany, Sueddeutsche Zeitung reported June 27. Wilhelm Karmann GmbH, the auto supplier that builds convertibles for companies such as Volkswagen AG, has already cut 500 of its 5,000 workers and may eliminate another 1,000 jobs, Handelsblatt reported on June 26.

The Exception

Companies cutting thousands of jobs are the ``exception,'' Hans-Werner Sinn, president of Munich-based Ifo, told Focus magazine in an interview published today. While ``large'' companies are cutting staff, ``medium-sized'' companies are lending support to the economy and the labor market, said Weise.

``Economic and labor market developments are surprisingly robust,'' Dieter Hundt, head of the BDA employers' association, said today in a Bloomberg Television interview. ``I expect that we will continue to increase employment this year.''

In a survey of purchasing managers, an index measuring growth in manufacturing was revised up today to 52.6 in June from an initial estimate of 52.3 and 53.6 in May. A reading above 50 signals growth. A subindex measuring manufacturing employment fell to 53.3 in June from 54.8 in May and 55.6 in January.

The prospect of slowing growth pushed business confidence to the lowest since January 2006, according to Ifo. Coupled with rising oil prices and accelerating inflation, a cooling economy poses a dilemma for the European Central Bank.

Oil Record

Oil rose to a record $143.67 per barrel yesterday and German inflation -- harmonized to comply with European Union standards -- accelerated in June to the fastest pace since at least 1996.

That's strengthened the resolve of a majority on the ECB's 21-member governing council to tighten monetary policy. ECB President Jean-Claude Trichet on June 25 reiterated the bank may raise its key interest rate by a quarter-point to 4.25 percent on July 3 to contain inflation.

His comment has drawn criticism from politicians such as French Finance Minister Christine Lagarde, who's said that a significant rate increase may not be ``prudent.'' German Finance Minister Peer Steinbrueck said in a Bloomberg Television interview today that the ECB should ``consider carefully'' the implications of a widening interest rate spread to the U.S.

The inflation rate in the euro area rose to 4 percent in June, the highest in more than 16 years, from 3.7 percent in May, Eurostat, the European Union statistics office in Luxembourg, said yesterday. The ECB seeks to keep inflation just below 2 percent.

Unemployment in the 15 nations that share the euro remained at 7.2 percent in May, Eurostat said today. That is the lowest rate since the data series began in 1993.

According to the latest comparable data from the Organization for Economic Cooperation and Development, Germany's jobless rate was 7.4 percent in April, compared with 7.8 percent in France, 4 percent in Japan and 5 percent in the U.S. The OECD average that month was 5.5 percent.

In western Germany, the number of people out of work fell by a seasonally adjusted 21,000 to 2.14 million in June, while the number in eastern Germany declined by 17,000 to 1.13 million.

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net.

Last Updated: July 1, 2008 06:10 EDT