UPDATE 1-German jobless falls underscoring strong domestic economy
* Number of Germans out of work unexpectedly drops
* Data contrasts with bleak European labour market
* Strong labour market underpins consumption
By Sarah Marsh
BERLIN, June 27 (Reuters) - German joblessness unexpectedly dropped in June and the unemployment rate remained close to its lowest level since reunification more than two decades ago, underscoring the strength of the domestic economy.
While European peers struggle with spiralling unemployment, Germany's labour market is robust, propping up consumer morale which rose to its highest level in almost six years heading into July.
The government is relying on domestic demand to prop up growth this year as foreign trade, the traditional growth driver in Europe's largest economy, suffers from the euro zone's debt crisis and a slowdown in China.
"With yesterday's strong consumer confidence and today's good labour market report, domestic demand should continue being an important growth driver this year," said ING economist Carsten Brzeski.
"The German labour market remains the showcase example for successful labour market reforms," he said, referring to reforms carried out by former Chancellor Gerhard Schroeder in the 2000s that overhauled unemployment insurance, providing an incentive to work and making the labour market more flexible.
The number of people out of work fell by some 12,000 to 2.943 million in June, Labour Office data showed on Thursday, compared with the consensus forecast in a Reuters poll of 29 economists for a rise of 8,000. The jobless rate stayed close to a post-reunification low at 6.8 percent.
Data for May was revised upwards, to show a rise in unemployment of just 17,000 versus an originally reported 21,000. The jobless rate was revised downwards to 6.8 percent from 6.9 percent. Brzeski said the high number of public holidays and the cold weather in May had blurred the data.
The positive jobless figures strike a dramatic contrast to the situation in the broader 17-nation euro zone, where about 19.2 million people are now out of work, a top priority for EU leaders who meet on Thursday and Friday in Brussels, but with little concrete relief to offer.
Even in the bloc's number two economy, France, analysts polled by Reuters see unemployment at 11.5 percent in the last quarter of 2013.
Low unemployment in Germany has helped workers secure hefty wage hikes of up to 6.6 percent this year. That, combined with moderate inflation, has boosted shoppers' purchasing power at a time when the paltry interest rates being offered by banks give no incentive to save.
Germany's unemployment figures add to data suggesting the economy is regaining traction, after contracting at the end of 2012 and only narrowing avoiding a recession by growing 0.1 percent in the first three months of this year.
Business and investor sentiment is improving, foreign trade and output are increasing and the private sector is expanding slightly, though industrial orders have slumped.
The economy has not become a major election issue ahead of a national vote on Sept. 22 and is unlikely to if it remains as robust as the jobless figures suggest, boding well for German Chancellor Angela Merkel as she seeks a third term in office.