IHS Global: German August labour market report still gives
no indication of imminent end to improving trend
Frankfurt/Main (31.8.16) – In August, seasonally adjusted German unemployment declined by 7,000 month-on-month (m/m) to 2.675 million, reaching yet another record low since German re-unification in 1990. Although the pace has slowed again in recent months, following temporary acceleration in late 2015 and early 2016, unemployment has been enjoying a downward trend since mid-2009 that has encountered only two interim upward corrections. These were between April 2012 and November 2013 (by 87,000 overall) and, following a fresh drop by 70,000 between December 2013 and April 2014, 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 -10,000 per month during the last eleven 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 strengthening of the labour market in recent years.
The adjusted level of joblessness of 2.68 million in August 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 four 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 June, the latest month for which such data is available, 40,000 employees were affected (not adjusted for seasonal variations), which is down from 46,000 in May 2016 and 45,000 in June 2015. This level represents only 2.8% 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 11,000 in July, down from 13,000 in June and 16,000 in May. This is even lower than the previous 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 14.8% y/y in August, increasing further from 11.7% y/y in July and just 3.9% y/y only a quarter ago in May. 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 6,000 m/m in August, much of which reflects the greatly increased refugee inflow since mid-2015. That said, the rise in underemployment has actually lost momentum during July/August, following an interim peak of 18,000 m/m in June.
Meanwhile, 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. The increase at the data edge in July is 39,000, leading to a level of 43.61 million. Interestingly, this latest pace of employment growth broadly matches that of 2010-11, a time when German GDP growth was almost 4% and not just below 2% as at present. In cumulative terms, the latest level of employment is now 2.57 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 0.62 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 picked up to 7,000 in August, having only increased by half that amount on average during June/July. This broadly matches the 2015 average of 8,000 per month, and the upward trend observed since mid-2013 remains intact. Vacancies have now reached a new cyclical and also all-time peak of 664,000. 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 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 2016-17 as more and more asylum seekers obtain right of residence, although by the same token unemployment will soon also start increasing modestly once a rising number of refugees have completed government measures to gain language skills and raise qualification levels. 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 now looks to hurt German economic growth and thus labour market prospects only modestly. The economy enjoys 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 GDP growth of only 0.6-0.7% in 2012-13, acceleration to the 1.5% area has been observed during 2014-15. Even taking into account a dampening effect from Brexit, the latest IHS forecast published in mid-August foresees slightly stronger growth of 1.8% in 2016 and 1.7% 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 little impact on the services sector. Indeed, consumer confidence as measured by the GfK survey reached a 15-year high (jointly with June 2015) in August. Furthermore, 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 at or even slightly above capacity in the foreseeable future. IHS expects headline unemployment to gradually start rising in the coming months, possibly first touching 6.0% in September before rising to around 6.3% in late 2017 and during 2018. Much of this upward correction reflects the growing impact from refugees who are allowed to stay in Germany and are looking for work after the completion of any qualification measures. This anticipated mild 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.
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