March 3 - German retail sales came in much stronger than expected in January, showing traditionally conservative consumers are contributing to an economic recovery that shows little sign of faltering.

Two passersby carry shopping bag in front of a shop window in Munich, Germany (December 2010)

Figures from the Statistics Office on Thursday showed sales rose 1.4 percent on the month and 2.6 percent on an annual basis when adjusted for inflation, beating forecasts for rises of 0.5 percent and 1.6 percent respectively.

"Today's numbers should hush up all sceptics who have been mistrusting the recovery of the German consumer," said Carsten Brzeski from ING.

"With pent-up demand over the last years, strong economic prospects, more people at work and higher wages, the fundamentals for a decent consumption boom in Germany have hardly been better since reunification," he added.

Europe's biggest economy has recovered faster than expected from a recession in 2009 that was its deepest since World War Two, and by the fourth quarter of last year it was growing 4 percent year-on-year.

While German consumers have traditionally tended to save substantially -- leaving exports to drive growth -- a steady decline in joblessness and healthy industrial pay awards may be setting the stage for a sustained pickup in consumption.

Data earlier this week showed Germany's jobless rate fell again in February and manufacturing grew at its fastest pace since records began, raising hopes exports will continue to boom and consumers will keep spending despite rising prices.

Should it prove resilient, such buoyant domestic demand would also be welcomed by Germany's euro zone partners, which have complained that the country's growth has been too dependent on exports.

WAGE INCREASES

While major German consumer goods companies have seen their profits surge on the back of an improvement in the global economy and their operations abroad, some have noted a pickup in sales at home.

Sports giant Adidas AG posted record sales and raised its 2011 goals this week as its three-stripes logo lures buyers in emerging markets such as China -- but Germany, Britain and Spain also stood out in Western Europe.

With wage demands rising well above inflation this year, workers may well have more cash at their disposal to boost spending. In the latest negotiations, unions are demanding a 7 percent pay rise for some 550,000 chemicals sector workers.

Talks have already secured a pay hike of over 3 percent for around 100,000 workers at car giant Volkswagen after it had a record year.

"The conditions are still good for consumption: a positive development on the labour market in conjunction with reasonable wage increases will support consumption this year," said Dekabank analyst Andreas Scheuerle.

Economists have said employment should continue to grow despite an expected slowdown in growth this year, but they are cautious about the possible amplitude of any resurgence in spending. January could also be simply a correction to poor December figures, when freezing weather lead many shoppers to put off purchases until after the holiday season.

"In comparison to past years, there will be a revival in consumption but nothing too ebullient," said Torge Middendorf from WestLB.

By Brian Rohan
(Additional reporting by Sarah Marsh, editing by Patrick Graham)