German unemployment fell more than expected in August, with the jobless rate holding steady at a record low, offering reassurance that consumer spending will continue to drive growth in Europe’s largest economy this year.

The Federal Labour Office reported on Tuesday that the seasonally-adjusted unemployment total dipped by 7,000 to 2.79 million. Economists polled by Reuters had been forecasting a fall of only 2,000.

The jobless rate remained at 6.4 per cent for the fifth straight month. That is the lowest since German reunification in 1990.

German unemployment had unexpectedly risen in July, posting its biggest increase since May last year. But the latest data suggested this was just a blip.

"Economy and employment trends in Germany are pointing upward. Companies are well advised not to be unsettled by the recent excesses of the financial markets," KfW chief economist Joerg Zeuner said.

“The depreciation of the euro and the cheap oil have considerably strengthened competitiveness and demand,” he noted, adding that German companies would probably keep on hiring more staff in the coming months.

The labour market in Germany stands in stark contrast to the job situation in southern European countries such as Greece and Spain, which have unemployment rates of around 25 per cent and 22 per cent respectively.

At a meeting with Spanish prime minister Mariano Rajoy in Berlin on Tuesday, German chancellor Angela Merkel praised Spain's reform efforts.

"The situation on the labour market is still serious, but many new jobs are being created and thus Spain is contributing to Europe pulling itself out of the crisis step by step," she said.

Reuters