German unemployment dropped in February to its lowest level in nearly 1-1/2 years, boding well for domestic demand, which the government hopes will help drive growth this year.

The number of people out of work in Europe's largest economy decreased by 14,000 to 2.914 million, data from the Labour Office showed. That meant there were fewer unemployed people in Germany than at any time since September 2012.

The mid-range forecast in a Reuters poll had been for a drop of 10,000. It was the third consecutive monthly drop in joblessness.

"For 2014, a tightening German labour market raises our expectations that wages are also going to increase, which should feed through to higher consumption," said Christian Schulz at Berenberg Bank.

“(That) should allow Germany to rely on domestic demand for growth in 2014 as exports may face some pressure due to the emerging market crisis,” he added.

Separate data from the Federal Statistics Office today showed employment climbing to a record high of almost 42 million. That, along with moderate inflation, an expected rise in wages and low interest rates, should encourage traditionally thrifty Germans to spend rather than save.

Berlin expects private consumption, which boosted growth in 2013, to increase by 1.4 per cent as workers benefit from an increase in employment to an expected record of 42.1 million this year and a nominal 2.7 per cent jump in earnings.

Consumer morale has risen to its highest level in seven years as shoppers in Europe’s biggest economy have become more upbeat about their future income, a GfK survey showed this week.

The jobless rate held steady at 6.8 per cent, its lowest level since German reunification more than two decades ago. It was bang in line with the consensus forecast in a Reuters poll.

That makes Germany's labour market the envy of struggling euro zone peers like Greece, where more than one in four people are out of work.

Nonetheless, some businesses are cutting jobs. Barmer GEK, Germany’s largest statutory health insurance provider, said this week it was slashing 3,500 jobs, or 20 per cent of total staff, in response to deteriorating market conditions and changes in client behaviour.

Preliminary inflation data, due out today, is expected to show consumer prices rose by 1.3 per cent on the year in February.

Recent sentiment indicators have been upbeat but the latest hard data has shown exports, industrial output and orders falling in December while gross domestic product grew by just 0.4 per cent in the fourth quarter.

Some economists have therefore suggested the economy may not be faring as well as surveys suggest.

Reuters