IHS: German unemployment returns to downward trend in August following brief correction

 

Frankfurt/Main (2.9.15) – In August, seasonally adjusted German unemployment declined by 6,000 month-on-month (m/m) to a level only just above the joint May/June post-unification and 24-year low. July’s rebound by 8,000 thus proved very short-lived, and the underlying downward tendency existing since mid-2009 is reasserting itself. Nevertheless, the unemployment decline has effectively stalled during May-August, having still declined by 21,000 per month on average during the final quarter of 2014 and 14,000 in the first quarter of 2015. There have been only two mild interim upward corrections during the past six years – initially between April 2012 and November 2013 (by 90,000 overall) and, following a fresh drop by 78,000 between December 2013 and April 2014, during May-September 2014 (only 17,000 cumulatively). The mid-2014 upward correction had been due to stagnating GDP growth at the time, exacerbated by a recoil effect linked to an unusually mild winter and late timing of the summer holidays. Importantly, even during the more pronounced increase in 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, about double the average pace of -10,000 observed during the last eleven months. At the same time, employment has been increasing almost without interruption since late 2009, posting an average monthly increase of 30,000 during the past nearly six years. This is triple the size of the average pace of unemployment declines in this period, which 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 2.79 million in August, broadly matching the May/June all-time low since Germany was unified in 1990. This 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 August has remained at a post-unification record low of 6.4%. The unemployment rate had been fluctuating in a narrow band of 6.7-6.9% for three years starting in September 2011, but has been moving yet lower since October 2014. The latest Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain quite benign. In June, the latest month for which such data is available, 46,000 employees were affected (not adjusted for seasonal variations), which is 1,000 more than in May and 6,000 less than in June 2014. 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 an extremely low 13,000 in July, following 15,000 in June and 16,000 in May. 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) posted -3.0% y/y in August, little changed from -3.3% y/y in July and down from -1.4% a quarter earlier in May. This means that the degree of government support and thus relief effect for registered unemployment retains a diminishing tendency at the data edge.

Meanwhile, employment growth, data for which lags unemployment by one month, regained momentum in July after a more subdued pace in May-June. Employment in July increased by 26,000 in seasonally adjusted terms to a level of 42.91 million, the monthly change thus accelerating from an average of only 12,000 during the first half of 2015. This approaches anew the average increase of 29,000 during 2014 and 28,000 during the three-year period 2012-14. Prior to 2012, 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 1.87 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 0.51 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.

Seasonally adjusted vacancies continue to increase, albeit only by 4,000 in August, whereas the average pace of the preceding four months had been 8,000. Nevertheless, vacancies have thus reached a new cyclical peak of 574,000, and the increase at the data edge is broadly the same as the average seen since the start of a fresh upward tendency in mid-2013. The upward trend in the previous cycle had begun at around 280,000 in mid-2009, leading to an interim high at 501,000 in January 2012, whereas the latest improvement had already started from a much higher low-point of 448,000 in June 2013.

Overall, labour market conditions remain healthier in Germany than in most other countries in Europe. The boosting effect that the Eurozone debt crisis had on German unemployment during 2012-13 was a very mild one that was already fully unwound by late 2014 despite a fresh interim setback in mid-2014 due to temporary GDP stagnation at the time. This phase of stalling growth had left 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 have additionally been helped by the ongoing increase in the labour force, not least due to rising migration from troubled Eurozone countries and Eastern Europe, more recently also from the war-torn Middle East. The construction sector enjoys structurally robust demand conditions, partly related to rising immigration in recent years but also due to government policies encouraging additional investment in infrastructure. Overall, underlying German economic growth will remain quite robust during 2015-16 despite lingering Eurozone stability concerns, various geopolitical crises, and economic problems in major emerging market countries. Sharply lower oil price levels than until mid-2014, a much softer euro, and the ECB’s launch of a quantitative easing program in March are all providing support for economic activity at present.

Following only 0.4% in 2013, GDP growth has already accelerated to 1.6% in 2014 and IHS August forecasts look for 1.7% in 2015 and 2.1% in 2016 in calendar-adjusted terms (even 1.9% and 2.2%, respectively, in unadjusted terms, the format used by the German government in its projections). This expectation of ongoing robust growth momentum is being underpinned by the latest recovery of the Ifo business climate indicator after a short-lived relapse in May/June, and a similar rebound of manufacturing PMI in August. Furthermore, the full stimulating impact of the softer euro on German exports is only now becoming visible. Growth in 2015-16 is thus expected to 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 6.2% or even 6.1% in 2016.

Finally, a shift towards increased immigration since 2011 is currently changing demographic dynamics, with substantially more momentum emerging during 2015. Thus the working-age population and also labour supply will not decline any time soon, indeed increasing further at least during 2015-16. Other things equal, this is restraining 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
IHS Economics  – Western Europe