IHS Global: German labor market improves by more than expected in February

Frankfurt/Main (26.2.15) – Seasonally adjusted German unemployment declined -20,000 month-on-month (m/m) to yet another post-unification and 24-year low in February, the pace of decline broadly matching the average of the four preceding months. This confirms the resumption of a downward tendency existing since mid-2009 that has been interrupted twice in the meantime – initially between March 2012 and November 2013 (upward correction by 93,000 overall) and, following a fresh drop by 84,000 between December 2013 and April 2014, then during May-September 2014 (only 25,000 cumulatively).

This brief upward correction around mid-2014 had been due to stagnating GDP growth during the second and third quarters of 2014 and also a recoil effect linked to an unusually mild winter and late timing of the summer holidays. Importantly, even during the more pronounced upward correction of unemployment during 2012-13 there had been 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. With respect to unemployment, the average monthly decline between mid-2009 and the initial trough in March 2012 had been -19,000, and this exactly matches the pace of the last five months leading up to February 2015. At the same time, employment has been increasing almost without interruption since late 2009, 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 2.81 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 February has remained at a 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 clearly moving lower again. The latest Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain quite benign. In December, the latest month for which such data is available, 36,000 employees were affected (not adjusted for seasonal variations), which is 10,000 less than in November 2014 and 9,000 less than in December 2013. This level represents only 2.5% 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 16,000 in January, which compares to 22,000 in both December and November. 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 -1.2% y/y in February, which is down from -0.7% y/y in January and -0.3% in November 2014. 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, picked up additional momentum. Employment in January increased by 42,000 in seasonally adjusted terms to a level of 42.85 million, following a more limited average gain of 20,000 during November/December 2014 but an identical increase of 42,000 on average during September/October. For comparison, the average monthly employment increase was 34,000 during 2014 and 28,000 since the start of 2012. Prior to that, there had even been a phase between March 2010 and end-2011 in which the monthly increase averaged 47,000, which was linked to the post-Lehman economic recovery arriving in the labour market. In cumulative terms, the latest level of employment is now 1.81 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 0.47 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 2,000 to a new cyclical peak of 534,000 in February, although this represents a smaller increase than the 5,000 seen on average 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 unwound in the meantime. The only very limited magnitude of the renewed setback around mid-2014 is remarkable against the background of broadly stagnating GDP in the two middle quarters of 2014 and indeed fairly sizeable downward corrections of key leading indicators such as PMI and Ifo business climate between February/March and October 2014. This temporary relapse in growth thus led to only a small dent in the persisting underlying downward tendency for joblessness, and German consumer demand has consequently been hardly harmed. 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 recent developments surrounding Greece and pertaining to lingering 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, GDP growth has already accelerated to 1.6% in 2014 and IHS February forecasts look for 2.0% in both 2015 and 2016 in calendar-adjusted terms (even 2.3% and 2.1% in unadjusted terms as reported for instance by the German government). This expectation of a further strengthening of growth momentum is being underpinned by solid increases of the Ifo business climate indicator during November-February, rebounding after six consecutive months of declines prior to that, and it needs to be kept in mind that the full stimulating impact of the softer euro on German exports has yet to be seen. Growth in 2015-16 is thus expected to moderately 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 6.7% in 2014 to 6.4% in 2015 and 6.1% in 2016, with risks skewed towards an even greater decline. Eurozone debt crisis developments linked to 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 recent political volatility – 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