IHS: German labour market in good shape as October unemployment declines, September employment growth accelerates further
Frankfurt/Main (29.10.15) – In October, seasonally adjusted German unemployment declined by 5,000 month-on-month (m/m) to its lowest level since German re-unification in 1990. Following a sideways tendency in recent months, the downward trend existing since mid-2009 appears to have been resumed. Indeed, during those six years, there have been two prior upward corrections that ultimately failed to turn the trend, one between April 2012 and November 2013 (by 89,000 overall) and, following a fresh drop by 76,000 between December 2013 and April 2014, one in May/June 2014 (by 27,000). The latter had reflected temporarily stagnating GDP growth in combination with weather and holiday timing effects.
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, more than double the average pace of -8,000 observed during the last twelve months. By contrast, employment has been increasing almost without interruption since late 2009, posting an average monthly increase of 33,000 during the past six years. This is almost four times 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 2.788 million in October, a new post-unification all-time low. 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 October 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 very benign. In August, the latest month for which such data is available, 27,000 employees were affected (not adjusted for seasonal variations), which is 8,000 less than in July and 4,000 less than in August 2014. This level represents only 2% 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 24,000 in September, following extremely low levels of 11,000 in August and 13,000 in July. 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 -5.8% y/y in October, a larger decline than in September (-3.1% y/y) or a quarter earlier in July (-4.0% y/y). 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, data for which lags unemployment by one month, displayed an even more impressive performance in September. Following a phase with somewhat subdued momentum between mid-2014 and mid-2015, employment increased by 50,000 m/m in seasonally adjusted terms to a level of 43.13 million. This incorporates upward revisions to the levels in recent months of around 125,000. The latest monthly change compares favourably to an average of 40,000 during June-August, only 21,000 between August 2014 and May 2015, and 28,000 during the three-year period 2012-14. In fact, September employment growth equals the particularly rapid pace observed between March 2010 and January 2012 (monthly average 48,000) that had benefited from the post-Lehman economic recovery arriving in the labour market. In cumulative terms, the latest level of employment is now 2.09 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 well ahead of declines in unemployment, signalling an ongoing increase in the labour force.
In addition, seasonally adjusted vacancies have increased by a larger margin than ever before during the upward trend that has been observed since mid-2013, posting 15,000 m/m in October. This compares to an average monthly increase of only 5,000 since mid-2013, and vacancies have now reached a new cyclical and also all-time peak of 599,000. 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. Even the additional interim setback around mid-2014 due to temporary GDP stagnation had left only a small dent in the persisting underlying downward tendency for joblessness, and German consumer demand has consequently not been 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. The massive increase in the refugee influx (mostly from the war-torn Middle East) in recent months will strengthen this tendency during 2016 as more and more asylum seekers obtain right of residence, although by the same token unemployment will also increase modestly due to a combination of the sheer numbers of refugees and the need to raise their qualification levels first. The construction sector enjoys structurally robust demand conditions, partly related to sharply rising immigration 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 policy of quantitative easing (potentially to even be expanded and/or extended soon) 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 October 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 even an all-time high of the service-sector counterpart of the Ifo survey in October. This is only partly offset by a weakening of the manufacturing PMI index in September/October. Growth in 2015-16 is thus expected to exceed Germany’s current rate of potential growth of just under 1.5%. Taking the ramifications of refugee developments into account, IHS now expects unemployment in annual average terms to decline from 6.7% in 2014 to 6.4% in 2015 and broadly stay at this level during 2016-18, with a possible interim hump at 6.5% in 2017. It should be kept in mind that such slight deterioration of the unemployment statistic will go hand-in-hand with significant further growth in employment and thus income.
Finally, the general shift towards increased immigration since 2011, with considerably increased momentum observed during 2015, is substantially changing demographic dynamics at present. Thus the working-age population and also labour supply will not decline any time soon, instead increasing further at least for several years.
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