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UPDATE 2-German labour market feels effect of slowing economy

Michael Nienaber

* Jobless total rises 60,000 in May

* Economists expected drop of 8,000

* First rise in nearly two years

* Office points to special effect, slowing economy (Adds analysts, background, consumer sentiment)

BERLIN, May 28 (Reuters) - German unemployment unexpectedly rose for the first time in nearly two years in May, data showed on Wednesday, as slowing growth in Europe's largest economy spilled over into the labour market.

The number of people out of work rose by 60,000 to 2.279 million in seasonally adjusted terms, according to the Federal Labour Office. That compared with a Reuters consensus forecast for a decline of 8,000.

Germany's solid labour market has been the backbone of a domestically driven upswing in recent years. Several months of rising unemployment could weaken household spending and knock out one of the most important supports for growth.

Though the unexpected rise was mainly due to an audit of the status of some unemployment benefit recipients, the slowing economy also played a role, Labour Office head Detlef Scheele said.

"On the labour market, we can see first spill-over effects of the recently somewhat weaker economic development," Scheele said. "The demand of companies for new employees is weakening sharply while remaining on a high level."

He added, however, that the special factor was to blame for roughly two-thirds of the overall jobless rise of 60,000.

The seasonally adjusted jobless rate rose to 5.0%, the data showed. In unadjusted terms, unemployment increased by 7,000 to 2.236 million in May.

Germany's export-reliant industries are already facing obstacles from trade disputes and uncertainty linked to Britain's possible chaotic departure from the European Union.

"FAT YEARS OVER" "All good things must come to an end," said Thomas Gitzel, chief economist at VP Bank. "This applies also for the job bonanza on the German labour market."

Gitzel said that industrial companies were curtailing production in light of falling orders, which could be seen in lower demand for temporary workers.

The bleak labour market report comes after a survey showed on Tuesday that consumer sentiment unexpectedly cooled heading into June, falling to its lowest in more than two years.

"The fat years are over," said Bastian Hepperle from Bankhaus Lampe. "The labour market seems to have reached its zenith."

He added that overall employment remained relatively high, which should support private consumption and with it the domestically driven growth cycle.

The government last month halved its 2019 growth forecast to 0.5%, which would mark a sharp slowdown following calendar-adjusted growth rates of 2.5% in 2017 and 1.5% in 2018.

KfW analyst Martin Mueller said a temporary increase in the jobless total could not be ruled out. "However, a further reduction in unemployment is expected for the year as a whole," Mueller said.

"Due to the continuing shortage of skilled workers, the employment opportunities for unemployed people with sought-after qualifications are still excellent," Mueller said.

In a sign that German employment growth and the development of the jobless total are decoupling, employment as measured by the International Labour Organisation climbed to a record 45.11 million in April, seasonally adjusted data from the Federal Statistics Office showed earlier on Wednesday. (Reporting by Michael Nienaber; editing by Thomas Escritt, Larry King)