German unemployment fell further in August, but the biggest European economy is flirting with recession and its job market will probably feel the effects later this year, analysts said Thursday.

The number of jobless people declined by 40,000, surprising analysts who had expected a drop of just 10,000 after a decrease of twice that number in July.

Unemployment dipped to 7.6 percent of the workforce from 7.7 percent in July, according to adjusted figures released by the national employment agency.

At the end of August, Germany had a total of 3.196 million unemployed, the lowest level since February 1993 when the country was in recession.

Capital Economics economist Ben May called the figure "a rare piece of good news for the economy," and said it underpinned the view "that Germany is still in better shape than most other eurozone economies."

But Andreas Rees of UniCredit Markets warned that "the clock for the German labour market is literally ticking. It is only a matter of time before the economic slowdown will be felt."

Germany's economy contracted by 0.5 percent in the second quarter of 2008, the first time in four years that activity decreased, and a possible third quarter contraction would put it back into recession.

UBS economist Martin Lueck said: "We expect clearer traces of the economic slowdown to become visible later this year" in the job market.

He noted however that the August decline "was in line with the trend established over the past two years."

At Global Insight, Timo Klein expected unemployment "to fall modestly further during the latter months of 2008 and possibly even in early 2009, despite the dampening influence from the slowdown in economic growth."

Lueck said the reasons employment has resisted slowing economic growth could include labour reforms and that fact that "there has been no excessive hiring in the current cycle" that would normally be corrected during a downturn.

"The labour market has become more flexible, mostly through deregulation of temporary employment," he added, and "temp staffers are now serving as a cushion" and might be finding new jobs before they become unemployed.

Klein said the decline in unemployment "may temporarily stall during 2009," and noted that despite the improvement, consumers were still worried about inflation.

Domestic consumption has failed to take off in Germany despite steadily falling unemployment because household purchasing power has been undermined by high energy and food prices.

The declining jobless rate would "bottom out around year-end at the latest," Lueck forecast.