German unemployment fell to a record low, extending its five-year decline, as companies signalled confidence in Europe’s largest economy.

Joblessness decreased by a seasonally adjusted 14,000 in December to 2.26 million, more than economists predicted, supporting the Bundesbank’s outlook that growth momentum remains strong despite growing threats of protectionism and a disorderly Brexit. The jobless rate remained at 5 per cent.

"The labour market continued to develop well, even though the economic upswing has lost some momentum," said labor-agency head Detlef Scheele. "Companies' demand for new workers remains at a very high level."

The report suggests that domestic demand will support economic growth and that a contraction in the third quarter was a temporary setback caused by a decline in car production in response to new emissions tests.

Germany's Bundesbank says the unemployment rate could fall to 4.5 per cent by 2020 and remain on a downward trajectory thereafter. Still, the central bank noted signs of labour shortages, which companies say is dampening growth prospects.

Unemployment dropped by 9,000 in west Germany and by 5,000 in the eastern part.

- Bloomberg