Jan. 3 (Bloomberg) -- German unemployment fell in December by the most since reunification in 1990 as economic growth accelerated and unusually warm weather kept building sites open.

The number of people out of work, adjusted for seasonal swings, fell 108,000 to 4.12 million, the Nuremberg-based Federal Labor Agency said. The jobless rate fell to 9.8 percent, the lowest since August 2002, from 10.1 percent.

``We're in a truly upbeat economic environment,'' Stefan Bielmeier, a fixed-income strategist at Deutsche Bank AG, said in a telephone interview. ``Companies have good reason to consider hiring.''

Declining unemployment suggests that Europe's largest economy won't be unduly affected by Chancellor Angela Merkel's three percentage-point increase in the value-added tax on Jan. 1. The construction industry returned to growth in 2006 after 11 years of zero expansion, according to the HDB builders' association.

Germany's DIW economic institute, the largest of the country's six leading research institutes, today raised its outlook for growth this year to 1.7 percent from 1.4 percent. Gross domestic product may even reach 2.5 percent next year, the Berlin-based DIW said.

VAT Impact `Overstated'

The impact of higher VAT ``is being somewhat overstated,'' Heinrich Alt, deputy head of the Labor Agency, told reporters in Nuremberg today. ``I don't believe the VAT increase will cause a noticeable weakening of the labor market.''

The latest comparable figures from the Paris-based Organization for Economic Cooperation and Development show Germany's jobless rate was 8.2 percent in October. That compared with 8.8 percent in France, 4.1 percent in Japan and 4.4 percent in the U.S.

Deutsche Lufthansa AG, Europe's second-biggest airline, plans to create 3,000 new jobs in Germany this year to meet an expansion in air travel in the region, Frankfurt-based spokesman Michael Goentgens said yesterday. German companies such as Continental AG and Adidas AG plan to increase spending and hire new staff this year, a Bloomberg survey of Dec. 28 showed.

German companies, including businesses in the chemical, engineering and automobile industries, may create as many as 30,000 new jobs this year, the DIHK industry and trade chambers said on Dec. 27, citing a survey of 9,300 companies conducted last month. The DIHK represents more than 3 million companies.

Business Confidence

Business confidence in Europe's largest economy surged last month to the highest level since reunification of East and West Germany in 1990. The Munich-based Ifo economic institute on Dec. 14 forecast German growth of 2.5 percent in 2006 and 1.9 percent this year, raising previous forecasts for both years.

The nation's benchmark DAX stock index gained 22 percent in 2006, outpacing the Dow Jones Stoxx 600 Index for a second year.

The decline in unemployment in December ``is primarily due to the positive economic situation, but unusually mild weather has also played a role,'' the head of Germany's Federal Labor Agency, Frank-Juergen Weise, said today.

Last month was the warmest December in Germany in 32 years, the national weather service said on its Web site, noting the average temperature of 4.2 centigrade stood 3.4 degrees above the long-term average recorded in December between 1961 and 1990. Germany's main construction trade employs around 700,000 people, according to the IG BAU labor union.

Labor Market `Boon'

Employment, which is published with a one-month delay, rose 258,000 last year to 39.1 million, the Federal Statistics Office said yesterday, noting the 0.7 percent gain was the biggest in seven years. Executives view Germany as the most competitive of the 13 economies sharing the euro, Handelsblatt newspaper said yesterday, citing a survey of 1,175 European company leaders.

``Moderate wage rises and government-inspired steps to improve the terms for employment have proven a boon to the labor market,'' said Holger Schmieding, chief European economist at Bank of America in London. ``The economy is growing much faster than its trend potential; it is good news for hiring.''

Still, higher VAT coupled with increases in pension and health-care premiums are causing concern among consumers. GfK AG's consumer confidence index for January fell for a second month, the Nuremberg-based market research company said Dec. 29.

Wage Concern

With faster economic growth giving companies more room to raise prices and encouraging workers to demand more pay, investors expect the European Central Bank to lift interest rates again as soon as March, futures trading shows. The ECB increased borrowing costs for a sixth time in a year by a quarter-point to 3.5 percent on Dec. 7.

German steelworkers in September won the biggest pay increase in more than a decade, and officials at IG Metall, the country's largest union, are gearing up for another round of talks this spring for 3.2 million engineering and metal workers. In Bavaria, union officials plan to demand 8 percent more pay, the Berliner Zeitung reported on Dec. 6.

``Besides the cooling U.S. economy and Merkel's tax increases, the biggest threat to Germany's upswing could emerge if workers were to quit the path of (wage) moderation,'' Schmieding said. ``Anything above 3 percent poses a risk.''

West German adjusted unemployment fell by 74,000 to 2.73 million from 2.8 million in November, while the eastern German count dropped by 34,000 to 1.39 million, according to the labor agency.

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

Last Updated: January 3, 2007 07:31 EST