IHS Global: German labor market maintains improving tendency at moderate pace during January 

Frankfurt/Main (29.1.15) – Seasonally adjusted German unemployment declined -9,000 month-on-month (m/m) to yet another post-unification and 24-year low in January, although the pace has moderated from an average monthly decline of -21,000 during the fourth quarter of 2014. Nevertheless, the downward tendency continues, having been interrupted around mid-2014 due to growth stagnation during the second and third quarters of 2014 and also a recoil effect after the past unusually mild winter and late timing of the summer holidays.

German unemployment had previously already shown an upward correction by 94,000 overall during the twenty months between an interim low-point in March 2012 and a peak in November 2013, then unwound most of this during the following five months until April 2014 (-86,000 cumulatively), before rebounding once more by a net 26,000 during May-September. It is important to note that during upward correction of unemployment during 2012-13 there was a large concurrent increase in the labour force, rendering the very limited reaction of unemployment to the slowdown in GDP growth quite remarkable and also helping to explain why employment continued to increase steadily in this time. Prior to that, between mid-2009 and the trough in March 2012, German unemployment had been declining at an average pace of -19,000 per month. This pace was broadly matched again during the last four months leading up to January 2015 (average -18,000). The economic recovery since the second quarter of 2013 thus translated into a resumption of (modestly) falling joblessness since December 2013 that was interrupted only for a few months around mid-2014. At the same time, employment has been increasing almost without interruption since late 2009 already, and even in times of concurrently declining unemployment at a much faster pace than the latter. This demonstrates the robustness of the upward trend in the size of the labour force and therefore the extent of the underlying improvement in the labour market in recent years.

The adjusted level of joblessness was 2.84 million in January, establishing a new all-time low since Germany was unified in 1990. The latest level compares to a preceding cyclical trough of 3.18 million in November 2008 (end to economic boom of 2006-08) and the post-Lehman crisis peak of 3.49 million in mid-2009. The adjusted unemployment rate in January has declined from 6.6% (revised up from 6.5%) to a new post-unification record low of 6.5%. The unemployment rate had been fluctuating in a narrow band of 6.7-6.9% for three years starting in September 2011, but is now moving lower again. The latest Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain quite benign. In November, the latest month for which such data is available, 44,000 employees were affected (not adjusted for seasonal variations), which is 1,000 less than in October 2014 and 23,000 less than in November 2013. This level represents only 3% of the peak of 1.44 million seen in May 2009. Meanwhile, new applications for (cyclical) short-time work are estimated by the Agency at 22,000 in December, which compares to also 22,000 in November and 26,000 in October. Furthermore, the Agency states that the number of people benefiting from so-called active labour market policy measures (including that involving the activity of private firms) declined -1.0% y/y in January, which is down 0.3% y/y in December. This means that the degree of government support and thus relief effect for registered unemployment has returned to a diminishing tendency at the data edge.

Meanwhile, employment growth, data for which lags unemployment by one month, regained some momentum. Employment in December increased by 22,000 in seasonally adjusted terms to a level of 42.80 million, following only 13,000 in November but 41,000 on average during September/October. The average monthly employment increase during 2014 was 34,000. In a longer-term perspective, employment has been increasing at a monthly average pace of 28,000 since the start of 2012, which in turn follows a phase between March 2010 and end-2011 even boasting average monthly increases of 47,000 (post-Lehman economic recovery arriving in the labour market). In cumulative terms, the latest level of employment is now 1.76 million higher than at the time of its previous cyclical peak of 41.04 million in February 2009, before the global crisis of 2007-08 exerted its (lagged) effect. By contrast, unemployment only declined by 0.46 million in this period. Note that during the recession in the first half of 2009, employment had already been falling by less than unemployment was increasing, as firms aimed to hold onto their existing workforce wherever possible at the time (utilizing short-time work schemes instead). In that phase, the labour force had thus been increasing but firms refrained from hiring. Since the economic recovery took hold from mid-2009 onwards, employment gains have persistently stayed ahead of declines in unemployment, signalling an ongoing increase in the labour force. Separately, seasonally adjusted vacancies have increased by 6,000 to a new cyclical peak of 534,000 in January, broadly in line with the average increase during 2014. Vacancies have been enjoying an upward tendency since mid-2013, albeit only a very gradual one initially until mid-2014. The preceding upward trend had begun at around 280,000 in mid-2009, leading to an interim high at 502,000 in January 2012, whereas the current improvement had started from a much higher low-point of 448,000 in June 2013.

Overall, labour market conditions remain much healthier in Germany than in most other countries in Europe, and the boosting effect that the Eurozone debt crisis has had on German unemployment during 2012-13 has been a very mild one that has been fully overcome in the meantime. This ongoing improvement in underlying labour market conditions is noteworthy against the background of broadly stagnating GDP in the two middle quarters of 2014 and indeed fairly sizeable setbacks for key leading indicators such as PMI and Ifo business climate between February/March and October 2014. Unfavourable macroeconomic conditions during this period have thus only interrupted a persisting underlying downward tendency for joblessness, a factor that is underpinning German consumer demand. At the same time, employment developments are additionally being helped by the ongoing increase in the labour force, not least due to rising migration from troubled Eurozone countries and Eastern Europe. The construction sector enjoys structurally robust demand conditions, partly related to latest migration developments but also due to government policies encouraging additional investment in infrastructure. Overall, underlying German economic growth will strengthen now despite Eurozone concerns following the Greek election and also uncertainty stemming from current geopolitical crises in the Ukraine and in Iraq/Syria (threat from IS). Sharply lower oil prices, a much softer euro since mid-2014, and the ECB’s recent launch of a Quantitative Easing program are all providing fresh support for economic activity now.

Following only 0.2% in 2013, IHS‘ latest forecasts for (calendar-adjusted) GDP growth published in mid-January were 1.5% for 2014, 1.6% for 2015, and 1.9% in 2016. Given solid increases of the Ifo business climate indicator during November-January, rebounding after six consecutive months of declines prior to that, and factors such as still lower oil prices, a softening euro, and a robust US recovery, German economic growth is likely to perform even somewhat better than that during 2015-16. This would then slightly exceed Germany’s current rate of potential growth of just under 1.5%. For unemployment in annual average terms, this should mean a decline from 6.9% in 2013 and 6.7% in 2014 to 6.4% in 2015 and roughly 6% at end-2016. Eurozone debt crisis developments surrounding Greece and the geopolitical uncertainty created by the Ukraine-Russia stand-off remain background risk factors for the economic and thus also labour market outlook, but only in the event of a major renewed flaring up of general Eurozone tensions – which we do not expect despite the volatility caused by the new Greek government – there could also be a significant negative impact on the German labour market.

Finally, a shift towards increased immigration since 2011 has changed demographic dynamics to some extent. Thus the working-age population and also labour supply will not decline as much or indeed as soon as previously anticipated. Other things equal, this will restrain the medium-term downward trend for German unemployment, but it should not reverse it as long as the labour market can create enough new jobs. This will remain the case in the foreseeable future.

Timo Klein, Dipl. Volkswirt / Senior Economist