Oct. 1 (Bloomberg) -- Retail sales in Germany, Europe’s largest economy, unexpectedly fell in August as concern about rising unemployment kept a lid on consumer spending.

Sales, adjusted for inflation and seasonal swings, decreased 1.5 percent from July, when they rose 0.7 percent, the Federal Statistics Office in Wiesbaden said today. Analysts had forecast a 0.2 percent increase, the median of 28 estimates in a Bloomberg News survey showed.

Unemployment rose in September, a report showed yesterday. Jobless numbers will likely swell in coming months as companies that are using government-sponsored work programs with shortened hours will be forced to cut jobs eventually, economists said.

“People on short work hours end up with less money in their pockets to spend,” said Glenn Marci, an economist at DZ Bank AG in Frankfurt. “If companies cut down on those reduced- hour jobs and fire workers on a large scale, then that will really impact retail sales in the months to come.”

Government spending helped lift Germany’s economy out of its deepest recession since World War II in the second quarter, when it grew 0.3 percent. While measures of business and consumer sentiment are strengthening, the tailing off of stimulus measures and rising unemployment may hinder the pace of the recovery.

Unemployment rose by 10,000 on a seasonally adjusted basis last month, excluding statistical changes, the Federal Labor Agency reported yesterday. There’s “no turnaround” in the labor market, the agency said.

Worst Still Ahead?

German retail sales may decline 2 percent in nominal terms this year, industry association HDE said on Sept. 16. Forty percent of the retailers surveyed by the association said they expect the bottom of the economic crisis next year, compared with just 6 percent who foresee the trough in 2009.

Some indicators show that the economy is strengthening. Business confidence rose to a 12-month high in September, the Ifo Institute said on Sept. 24, and consumer sentiment as measured by Nuremberg-based market-research group GfK AG improved to the highest in 16 months. The pace of economic expansion may have accelerated to 0.7 percent in the third quarter, the Berlin-based DIW institute said this week.

While the Kiel-based IfW economic institute forecasts that consumer spending will decline next year, German Chancellor Angela Merkel has played down expectations that her incoming coalition of Christian Democrats and the Free Democratic Party will implement rapid tax cuts as part of measures to help the economy.

“The labor market has held up so far, but we fear that this will change and private consumption will be ground beneath the wheels in the fourth quarter,” said Jens Kramer, an economist at NordLB.

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

Last Updated: October 1, 2009 03:39 EDT