IHS Global: May German labour-market report less positive

after accounting for government measures

 

Frankfurt/Main (31.5.16) – In May, seasonally adjusted German unemployment declined by 11,000 month-on-month (m/m) to 2.695 million, reaching yet another record low since German re-unification in 1990. This broadly matches the average pace of decline observed since October 2015, following half a year of almost stagnation phase during the second and third quarters of 2015. In a wider time frame, unemployment has now been enjoying a downward trend since mid-2009 that has encountered only two interim upward corrections, specifically between April 2012 and November 2013 (by 87,000 overall) and, following a fresh drop by 70,000 between December 2013 and April 2014, one in May/June 2014 (by 24,000).

The latter was more technical than cyclical in nature, given 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, which was followed by near-stagnation (only -2,000 per month) in the three-and-a-half subsequent years until September 2015. By contrast, employment has been increasing almost without interruption since late 2009, posting an average monthly increase of 35,000 during the past six-and-a-half years. This is almost four times the size of the average pace of unemployment declines in this period (-9,000), 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 of 2.695 million in May 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 has fallen to 6.1%, the lowest level in the history of pan-German data (since 1992). 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 declining again since October 2014. The latest (extrapolated) Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain benign. In March, the latest month for which such data is available, 53,000 employees were affected (not adjusted for seasonal variations), little changed from 54,000 in February. This level represents only 3.7% of the peak of 1.44 million seen in May 2009. Furthermore, new applications for (cyclical) short-time work are estimated by the Agency at only 24,000 in April, up just slightly from 19,000 in March and 22,000 in February (there had been a trough at around 12,000 in July/August 2015). Importantly, however, the Agency also states that the number of people benefiting from so-called active labour market policy measures (including that involving the activity of private firms) were up by 4.2% y/y in May, increasing markedly from 1.0% y/y in April and -1.6% y/y a quarter earlier in February. This means that the degree of government support and thus relief effect for registered unemployment has picked up markedly of late, reversing the diminishing tendency that had been observed previously. Recent unemployment declines are therefore no longer market-driven. Indeed, a separate statistic showing underemployment as opposed to unemployment reveals that the former increased (seasonally adjusted) by 9,000 m/m in April and even 18,000 m/m in May.

 

By contrast, employment, data for which lags unemployment by one month, continues to increase at a healthy clip. Following a phase with somewhat subdued momentum between mid-2014 and January 2015 (average monthly increase of 17,000), employment growth (seasonally adjusted) has returned to a monthly pace of 45,000. The latest reporting month of April, showing an increase of 41,000 m/m to a level of 43.50 million, does not signal any slowdown as yet. Interestingly, this pace of employment growth broadly matches that of 2010-11, a time when German GDP growth was almost 4% and not roughly 2% as at present. In cumulative terms, the latest level of employment is now 2.46 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 0.60 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.

 

Growth in seasonally adjusted vacancies revealed fresh acceleration in May, posting an increase of 15,000. This compares to only 4,000 per month during February-April and 8,000 per month during 2015. The upward trend observed since mid-2013 thus remains fully intact. Vacancies have now reached a new cyclical and also all-time peak of 653,000. 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 449,000 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 was consequently never harmed lastingly. 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) since mid-2015 will strengthen this tendency during 2016 as more and more asylum seekers obtain right of residence, although by the same token unemployment will probably also increase modestly from around mid-2016 onwards given the sheer numbers of refugees and the need to raise their qualification levels first (which – on average – will take years). Given the administrative lags involved as authorities have been overwhelmed by the numbers, it was never likely that German labour market statistics would reflect this factor in a significant manner ahead of the second half of 2016. Meanwhile, 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 robust during 2016 despite lingering Eurozone stability and emerging market concerns as well as various geopolitical crises with associated risks of enhanced terrorist activity. Sharply lower oil price levels than until mid-2014, a much softer euro, and the ECB’s (recently expanded) policy of quantitative easing are all providing support for economic activity at present.

 

Following only 0.4% in 2013, GDP growth has already picked up to around 1.5% during 2014-15, and the latest IHS forecast published in mid-May looks for modest further acceleration to 1.9% in 2016 and 2.0% in 2017. This expectation of ongoing robust growth momentum is being underpinned by healthy signals coming from the services and construction sectors and an increase in public consumption, partly to care for refugees’ subsistence needs. Leading indicators reflecting manufacturing sector conditions in general and export prospects in particular (notably the relevant PMI survey and the Ifo business climate indicator) have also recovered during March-May following interim downward corrections around the turn of the year 2015/16. On balance, German economic growth in 2016 continues to be expected to exceed the country’s rate of potential growth, which we would estimate in a range of 1.25-1.50% at present. Taking the ramifications of refugee developments into account, IHS now expects unemployment in annual average terms to decline from 6.7% in 2014 and 6.4% in 2015 to 6.2% (possibly even 6.1%) in 2016 before rebounding modestly to the 6.5% area in 2017-18. 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 second-half 2015, is substantially changing demographic dynamics and thus the long-term outlook 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.

Timo Klein Dipl. Volkswirt Principal Economist IHS Economics – Western Europe