Aug. 4 (Bloomberg) -- Germany's unemployment rate rose to an 11-month high in July, reducing the chances that consumer spending in Europe's biggest economy will recover from two years of stagnation.

The unemployment rate rose to 10.6 percent from 10.5 percent in June, the Nuremberg-based Federal Labor Agency said. The number of jobseekers rose a seasonally adjusted 11,000 to 4.39 million, the sixth straight monthly increase.

An export-led recovery in Germany hasn't been strong enough to persuade executives to take on more workers, keeping retail spending subdued as consumers worry about job prospects. Companies such as DaimlerChrysler AG and Siemens AG are demanding staff work longer hours or risk jobs being relocated to lower-cost countries.

``It's a vicious circle,'' said Joerg Lueschow, an economist at Westdeutsche Landesbank Girozentrale in Dusseldorf, who forecast the number of jobseekers would rise by 10,000, in a telephone interview. ``We need more employment for consumer spending to rise, but companies won't hire as long as domestic demand is weak.''

KarstadtQuelle AG, Germany's largest department-store operator, today said it will have its first annual loss in at least five years and will step up an overhaul by selling units and slashing costs. The Essen-based company, which wants to cut staff at its stores by 4,000 through 2006, is also seeking to extend the working week to as much as 42 hours.

Employment Declines

The labor agency today revised an originally reported fall of 1,000 in unemployment in June to an increase of 2,000. Employment in May fell 10,000 from April. The number of people with a job has risen in only one month over the past 2 1/2 years. Employment figures lag those for joblessness by two months. Labor agency board member Heinrich Alt told reporters in Nuremberg he doesn't expect an increase in employment this year.

The agency said Germany's unemployment rate, adjusted for European Union standards, rose to 9.9 percent in July from 9.8 percent in June, when only Spain had higher unemployment levels in the euro region.

Falling job numbers in Germany contrast with employment growth in the U.S., where a report to be released Friday will probably show 243,000 jobs were created in June and an unchanged unemployment rate of 5.6 percent, the median of 70 forecasts in a Bloomberg News survey showed.

``All the signs point to the German economy recovering but it hasn't affected the labor market yet,'' the labor agency said. Economists had expected the number of unemployed to increase by 5,000 in July, according to the median of 34 forecasts in a Bloomberg survey.

Ludwigshafen-based BASF AG, the world's biggest chemical maker, which today raised its full-year forecast after profit increased for a second consecutive quarter, ``most probably will not increase'' its workforce in Germany, said Chief Executive Officer Juergen Hambrecht in an interview.

Working Hours

Rather than taking on new staff, Germany's biggest companies want their employees to work longer hours. In June, Munich-based Siemens won an extension of the work week at two phone factories to 40 hours from 35 hours at no extra pay, after threatening to cut 2,000 jobs there. DaimlerChrysler employees at Mercedes factories in Germany agreed last month to smaller pay increases and longer hours to save 500 million euros a year.

The BDI industry association, which represents 107,000 German companies, has raised its forecast for export growth from the world's No. 2 trading nation to 8 percent for 2004, its president, Michael Rogowski, said July 21.

Service industries in the 12 countries using the euro expanded for a 13th month in July as accelerating economic growth led to increased spending on banking and travel, an index based on a survey of 2,000 purchasing managers compiled for Reuters Group Plc by NTC Research Ltd. showed today.

Retail Sales

Such growth has yet to filter through to German consumers, whose confidence sank to a one-year low in July, a report by Nuremberg-based consumer research group GfK showed last week. Retail sales in the first six months fell an inflation-adjusted 1.4 percent from the same period a year earlier, the Federal Statistics Office said Friday.

``Companies want to see more improvements in the economy before hiring again, especially in the current situation, where the recovery is export-led and has failed to gain a foothold in the domestic market,'' said Stephan Rieke, an economist at ING BHF- Bank AG in Frankfurt, who forecast the number of jobseekers would remain unchanged.

`Extremely Difficult'

Volkswagen AG, Europe's largest carmaker, plans to cut 5,000 jobs by 2005 to boost profit. Nestle Deutschland AG, the German unit of the world's largest foodmaker, said it will eliminate about 230 jobs by the end of next year because of the ``extremely difficult'' situation in the German economy.

German stocks fell today as the price of oil reached a record high for a fourth day, increasing concerns corporate profits will be eroded. The benchmark DAX Index declined 65.87, or 1.7 percent, to 3811.45 as of 1:09 p.m. in Frankfurt.

Consumer spending accounts for more than half of the German economy, while exports make up less than a third. The Essen-based RWI institute, which is forecasting economic growth of 2.1 percent for this year, expects foreign trade to contribute 1.3 percentage points to growth, with consumer spending only adding 0.2 percentage points.

The RWI growth forecast is more optimistic than those of the five other leading state-funded economic institutes and of Chancellor Gerhard Schroeder's council of economic advisers, who expect 1.8 percent growth this year.

``We clearly need more than 2 percent growth for a significant reduction in unemployment,'' Ludwig Georg Braun, president of the DIHK industry lobby, said in an interview in Berlin today.

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