Jan. 4 (Bloomberg) -- German unemployment rose to a seven- year high in December, as companies including Deutsche Bank AG announced job cuts and pessimism mounted about prospects for Europe's largest economy.

The number of people out of work rose a seasonally adjusted 17,000 to 4.48 million, the Federal Labor Agency said today in Nuremberg. Economists expected an increase of 10,000, the median of 26 forecasts in a Bloomberg survey showed. The jobless rate stayed at a six-year high of 10.8 percent.

``Companies are simply too hesitant to hire at the moment -- they're preoccupied with cutting costs and thinking twice whether they want to afford new hires,'' said Thomas Leonhard, who helps manage the equivalent of $8 billion at Munich Ergo Asset Management. ``The labor market remains in a very fragile state and that picture may not change for the next two quarters.''

Berlin's DIW institute today joined the five other main German economic research bodies in lowering growth forecasts for this year, citing the impact on exports of the 7.6 percent rise in the euro last year. Labor agency board member Heinrich Alt said yesterday he only expects a reduction in unemployment if economic growth is ``clearly above 1.75 percent.''

The DIW cut its 2005 growth forecast to 1.8 percent from 2 percent, close to the prediction by Chancellor Gerhard Schroeder's government for economic expansion of 1.7 percent. The five other institutes predict growth of between 0.8 percent and 1.3 percent.

Frankfurt-based Deutsche Bank, Europe's third-biggest bank, said on Dec. 1 it will fire 1,920 workers in Germany -- 7 percent of its staff in the country -- in 2005 and 2006 to cut costs as it struggles to make the company as profitable as its competitors.

Henkel, Debitel

Other German companies cutting costs include Dusseldorf - based Henkel KGaA, the detergent maker that bought Dial Corp. last year, which said Nov. 25 it will trim its workforce by 3,000 worldwide this year and next. Mobile-phone company Debitel AG last month said it will reduce its 1,600-strong workforce in Germany by as many as 150 starting this year.

``Companies aren't done yet with cutting costs,'' said Rainer Guntermann, an economist at Dresdner Kleinwort Wasserstein in Frankfurt, who forecast an increase in unemployment of 12,000 in December. ``We are not in any economic environment that would warrant hiring.''

France Stagnates

Germany's neighbors are also struggling to grow as unemployment weighs on consumption and the euro's gains threaten exports. In France, Germany's biggest trading partner, the economy stagnated in the third quarter as consumer spending dropped. French unemployment rose in November, leaving the jobless rate at a five-year high of 9.9 percent.

The euro, which reached a record $1.3666 on Dec. 30, fell to $1.3377 from $1.3465 at 10:58 a.m. in Frankfurt, declining for a third day.

Unemployment in the 12 nations sharing the euro held at 8.9 percent in October for the 20th month, according to Brussels-based Eurostat. Germany's December rate, adjusted for EU calculations, was 10 percent, the Labor Agency said.

The rise in joblessness in Germany contrasts with the U.S., where economists expect 175,000 new jobs were created last month, keeping the jobless rate at 5.4 percent, according to the median estimate of 67 economists in a Bloomberg survey. The Labor Department releases the report Jan. 7.

New Benefits

Half of the increase in December's German jobless total is caused by government changes to the labor market, according to Frank-Juergen Weise, head of the Labor Agency. A growing number of former social-welfare recipients registered as unemployed last month to become eligible for new benefits introduced in January.

Today's report also showed that seasonally adjusted number of employed people rose 28,000 in October, almost double the September increase of 15,000, reflecting government steps to boost temporary work, encourage self-employment and improve conditions for low-wage jobs, according to Weise. The labor agency revised September's total from an initial drop of 1,000. Figures for employment are published two months later than jobless data.

Germany's GfK market-research company, which releases monthly surveys of consumer confidence, last week reported a drop in its sub-index for the economic outlook by 1.3 points to minus 18.3. Germany's economy grew only 0.1 percent in the third quarter, the slowest pace in more than a year, as exports dropped and consumer spending stagnated.

Tobacco Taxes

Higher tobacco taxes in Germany and Italy pushed up inflation in the 12 euro nations in December, further eroding consumers' spending power. Consumer prices rose 2.3 percent from a year ago after gaining 2.2 percent in November, Eurostat said in Brussels today.

Even so, a 24 percent fall in oil prices since they touched a record $55.67 a barrel Oct. 25 has helped moderate fears that the euro's surge may erode Germany's export-led recovery. Business confidence in Germany unexpectedly rose to an eight-month high in December.

Unemployment, which last month was the highest since December 1997, during Chancellor Helmut Kohl's last year in office, is also undermining consumer spending, the largest part of Germany's economy. Retail sales in October fell 3.7 percent from a year earlier.

Germans' concerns about unemployment and measures by Schroeder's government to cut jobless and health benefits and freeze pensions have led consumers to hold on to their money rather than spending it, swelling the country's savings rate to more than double that of the U.K., according to the Bundesbank.

Sentiment `Grim'

New measures cutting benefits for the long-term unemployed took effect on Jan. 1. Those without a job, including people previously registered as social-welfare recipients rather than as jobless, will also face increased pressure to accept job offers or risk losing benefits. The changes will add an as yet undetermined number of people to the January jobless total.

``Underlying sentiment remains grim,'' said Holger Wenzel, managing director of the HDE retailers' group representing 100,000 retailers, in an interview. ``It gives companies anything but a reason to hire.''

Wenzel said ``consumers are in no mood to spend'' even though tax cuts that also took effect at the start of this month will take 6.5 billion euros off consumers' income-tax bills in 2005.

To contact the reporter on this story: Andreas Cremer in Berlin acremer@bloomberg.net.

Last Updated: January 4, 2005 05:29 EST