BERLIN (Reuters) - Unemployment in Germany unexpectedly rose in October, the first increase since early 2010, data showed on Wednesday, compounding fears about the effects of a slowdown in Europe's biggest economy.
The seasonally adjusted figures from the Federal Labour Office showed unemployment rose by 10,000 compared to an expected drop of 10,000. That pushed the unemployment rate up to 7.0 percent from 6.9 percent in September.
Economists said the rise confirmed that Germany, which still has lower unemployment rates than elsewhere in Europe, was facing an underlying downturn and that uncertainty over the euro zone debt crisis was affecting hiring at firms.
"(The rise) confirms the euro zone's largest economy is experiencing an underlying economic downturn," said Jennifer McKeown, an economist at Capital Economics, adding the deterioration may mark the start of a trend.
She said the increase -- the first since February last year -- could hurt consumer spending, already under pressure from high inflation.
"The threat of further bailouts for the banking sector or peripheral euro zone economies will mean that cautious German consumers prefer saving to spending. The upshot is that as exports fall, consumers will not pick up the slack, leaving Germany at risk of recession," she said.
Germany's economy recovered quickly from the financial crisis and has been Europe's main engine of growth.
But the pace of expansion is easing due to a global slowdown and uncertainty stemming from the euro zone debt crisis which is hitting investment and exports.
The government last month nearly halved its growth forecast for next year to one percent.
At the start of her second term in 2009, conservative Chancellor Angela Merkel made jobs a top priority. Now the euro zone debt crisis has caused her ratings to slide, she will want to ensure the labour market does not deteriorate significantly.
"The labour market remains stable but nevertheless we should be cautious in view of the overall economic risks," said Labour Minister Ursula von der Leyen. Opposition lawmakers have warned the government against complacency.
Federal Labour Office chief Frank-Juergen Weise said the overall trend remained positive and he blamed the surprise increase in unemployed people on particularly strong labour market developments in September.
"We do not see this as a turn for the worse," Weise said.
FEELING THE PINCH
However, the unemployment figures merely add to the gloomy picture painted by a range of recent economic data.
Germany's manufacturing sector contracted in October for the first time in more than two years and the latest Ifo think tank survey showed business sentiment dipping to its lowest level since mid-2010.
Several German firms, including carmakers Daimler (DAIGn.DE) and Volkswagen VOWG_P.DE, have given downbeat forecasts for demand.
Truck and bus maker MAN (MANG.DE) cut production in response to slowing orders intake in the third quarter and said earlier it could lay off temporary workers if demand for trucks slumped more steeply. It also expects demand from Europe to remain muted.
Retail group Metro AG (MEOG.DE) has said it would cut 3,000 jobs from its Media-Saturn chain of consumer electronics shops across Europe and tour group TUI AG recently announced plans to cut 550 jobs in Germany.
"Companies are becoming a bit more cautious now due to the sovereign debt crisis and the slowing of the world economy," said Rainer Sartoris, an economist at HSBC Trinkaus.
"We're not expecting a sudden turn for the worse. But the big hiring wave we've seen in the past is over for now."
The Economy Ministry said last month it expected German unemployment to continue to fall next year, with the jobless rate dropping to 6.7 percent from 7 percent in 2011.
(Additional reporting by Alexandra Hudson, Erik Kirschbaum, Stephen Brown, Holger Hansen, Joerg Voelkerling in Nuremberg, Maria Sheahan and Victoria Bryan in Frankfurt; Writing by Madeline Chambers; Editing by Stephen Nisbet)