IHS Global: Increasing government measures widen gap between declining headline and rising underlying German unemployment in July

 

Frankfurt/Main (28.7.16) – In July, seasonally adjusted German unemployment declined by 7,000 month-on-month (m/m) to 2.682 million, reaching yet another record low since German re-unification in 1990. Although the pace has slowed most recently, unemployment has 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. The average monthly decline in unemployment between mid-2009 and the initial trough in March 2012 had been -19,000, followed by near-stagnation (only -2,000 per month) in the three-and-a-half subsequent years until September 2015, and now -11,000 per month during the last ten months. By contrast, employment has been increasing almost without interruption since March 2010, posting an average monthly increase of 37,000. This is 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 2.68 million in July 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 now been at 6.1% for the last three months, 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 May, the latest month for which such data is available, 46,000 employees were affected (not adjusted for seasonal variations), which is down from 56,000 in April and little changed from 44,000 in May 2015. This level represents only 3.2% 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 13,000 in June, down from 16,000 in May and 24,000 in April. This broadly matches the trough at around 12,000 in July/August 2015. Separately, 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 13.2% y/y in July, increasing further from 8.8% y/y in June and 0.9% y/y only a quarter ago in April. This means that the degree of government support and thus relief effect for registered unemployment has picked up lately, reversing the diminishing tendency that had been observed until end-2015. 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 14,000 m/m in July, following even 18,000 m/m in both June and May. This development largely reflects the refugee inflow.

 

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 May 2014 and January 2015 (average monthly increase of 20,000), employment (seasonally adjusted) has since grown at an average monthly pace of 45,000. 45,000 is coincidentally also the increase at the data edge in June, leading to a level of 43.57 million. 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 2.53 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 0.61 million in this period. 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 remained modest at 3,000 in July, having shown a one-off spike to 13,000 in May but also an average of 3,000 during February-April. This is below the 2015 average of 8,000 per month, but the upward trend observed since mid-2013 remains intact. Vacancies have now reached a new cyclical and also all-time peak of 656,000. 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 quite healthy in Germany. 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. Since mid-2009, there has been a persisting underlying downward tendency for joblessness, an important factor bolstering German consumer demand. 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 soon also start increasing modestly 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. The Brexit event will modestly hurt German economic growth during the next several quarters, but the economy should stay fairly resilient due to ongoing support from sharply lower oil price levels than until mid-2014, a soft euro, and the ECB’s (recently expanded) policy of quantitative easing.

 

Following only 0.4% in 2013, GDP growth had already picked up to around 1.5% during 2014-15. Taking into account an anticipated dampening effect from Brexit, the latest IHS forecast published in mid-July looks for a continuation of this pace of the last two years also in 2016-17 (1.6% in 2016, 1.4% in 2017). Latest signals from leading indicators, specifically the PMI and Ifo business climate surveys, suggest only a moderate setback to manufacturing sector conditions and hardly an impact on the services sector. Indeed, construction output and public consumption, the latter also reflecting refugees’ subsistence needs, will remain supportive elements that are not affected by negative international developments. As we estimate Germany’s current rate of potential growth to be in a range of 1.25-1.50%, the German economy will thus run near capacity in the foreseeable future. IHS expects unemployment in annual average terms to start rising from a trough of 6.1% at present to around 6.5% in late 2017 and during 2018. Much of this upward correction reflects the growing impact from refugees who have been granted asylum status and are subsequently looking for work. Thus this anticipated deterioration of the unemployment statistic should go hand-in-hand with 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 and early 2016, has substantially changed demographic dynamics and thus the long-term outlook. The working-age population and also labour supply will not decline any time soon, instead increasing further at least for several years.

Timo Klein  Principal Economist | IHS Markit Economics