German unemployment dropped more than expected in July and retail sales climbed in June, data showed on Thursday, spelling good news for private consumption which is expected to drive growth in Europe's largest economy this year.

Seasonally adjusted data from the Labour Office showed the number of people out of work decreased by 12,000 to 2.898 million. The consensus forecast in a Reuters poll had been for a drop of 5,000.

"The fundamentals for German household spending are very strong. Unemployment is at long-term lows, employment at highs. Wages are rising, inflation is very low and the uncertainty of the euro crisis has faded," said Christian Schulz, senior economist at Berenberg Bank.

German consumer morale rose to its highest level in more than 7-1/2 years heading into August as shoppers became more upbeat about their future income prospects than at any point since 1991, helped by a robust labour market and low inflation, which currently stands at just 0.8 percent in Germany.

The jobless rate was steady at 6.7 percent, setting Germany worlds apart from euro zone peers like Greece and Spain, where around one in four people continue to be unemployed.

But some companies are still slashing jobs in Germany. Firms ranging from lighting maker Osram Licht AG (OSRn.DE) and solar company SMA Solar (S92G.DE) to Commerzbank (CBKG.DE) and industrial services group Bilfinger (GBFG.DE) have all announced they will be trimming their workforces.

Data from the statistics office showed German retail sales rose by 1.3 percent in June in real terms on the month - their strongest rise since January and potentially a result of Germans hitting the shops at the start of the soccer World Cup.

Schulz said retail sales had risen by 1.4 percent in the first half of 2014 compared with the same period earlier, suggesting they could grow by 2.8 percent this year.

"That is a very healthy clip which should make consumption a key driver of overall demand," he said.

The German economy grew at its fastest rate in three years in early 2014 but that was largely due to mild weather so it is expected to slow or even stagnate in the second quarter before picking up again in the third.

Other recent data has pointed to a slowdown, with exports, industrial orders and production all falling. Germany's VDMA engineering body has also slashed its output forecast for this year. Surveys have shown business and investor morale weakening but consumers remain a source of support.