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By Dave Graham
BERLIN, May 29 (Reuters) - German retail sales unexpectedly rose in April, raising hopes that consumer spending could help support the economy after a record slump in gross domestic product in the first quarter, official data showed on Friday.
Sales rose by 0.5 percent from the previous month in real and seasonally adjusted terms, the Federal Statistics Office said -- the strongest increase since December. A Reuters poll had forecast sales would be unchanged on the month.
German GDP contracted by 3.8 percent in the first three months of 2009 but private consumption took some of the edge off the blow, rising by 0.5 percent quarter-on-quarter, boosted by a government subsidy to encourage car buying.
"Today's numbers give some hope that private consumption could cushion the downswing of the German economy even once the (government) car scrap scheme has been fully utilised," said Carsten Brzeski, an economist at ING financial markets.
However, worries about the retail sector remain as Germany battles its sharpest recession since World War Two.
Unemployment rose for the seventh month running in May, and hundreds of thousands of workers are now on shortened hours.
Firms are feeling the heat from the crisis, with retail and
tourism group Arcandor
The government expects Europe's largest economy to contract by six percent this year, and some observers are even more pessimistic. Nevertheless, latest forward-looking indicators have suggested the slump could be bottoming out.
LABOUR MARKET HOLDS KEY
The Statistics Office also said German March retail sales had been revised up to show a drop of 0.4 percent on the month. It had originally reported a monthly decline of 1.0 percent.
"So far, German consumers have been the positive surprise during the recession. Consumer confidence has been stable for several months. Now, it looks as if consumers are finally putting their money where their mouth is," said Brzeski.
Year-on-year, April sales fell by 0.8 percent in real terms. In nominal terms, sales were up by 0.9 percent month-on-month and down by 0.9 percent on the year.
Alexander Koch, an economist at UniCredit, said although inflation had disappeared for the time being, the German consumer spending rally was likely to taper off in coming months once the effects of the car subsidy began to fade.
Looking forward, analysts said much would depend on how extensive future job losses proved to be. Germany's key manufacturing sector in particular has been hit hard.
Data from the VDMA plant and equipment makers' association published on Thursday showed German engineering orders fell in April by 58 percent in real terms from the previous year. This was the biggest decline since records for the sector began.
"For the rest of 2009, we will see a neck-and-neck race of higher disposable incomes and pent-up demand against increasing worries about job losses," said ING's Brzeski. "The interim results are promising but the final results are still open." (Writing by Dave Graham, editing by Mike Peacock/Toby Chopra)