IHS Global: German November labour market report reveals further slight unemployment decline, waning momentum of employment growth

 

Frankfurt/Main (30.11.16) – In November, seasonally adjusted German unemployment declined by 5,000 month-on-month (m/m) to 2.658 million. This is the lowest level since German re-unification in 1990. Unemployment has been enjoying a downward trend since mid-2009, interrupted only twice by modest upward corrections between April 2012 and November 2013 (by 85,000 in net terms) and 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 -18,000, followed by near-stagnation (only -2,000 per month) in the three-and-a-half subsequent years until October 2015, and now -9,000 per month over the past thirteen months. By contrast, employment has been increasing almost without interruption since March 2010, posting an average monthly increase of 34,000. 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 strengthening of the labour market in recent years.

 

The adjusted level of joblessness of 2.66 million in November 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 now stands at 6.0%, as already in October. This is the lowest level in the history of pan-German data (since 1992). The unemployment rate had been fluctuating in a narrow band of 6.7-7.0% for three years starting in September 2011, but has probed yet lower levels since October 2014. The latest (extrapolated) Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain benign. In September, the latest month for which such data is available, 30,000 employees were affected (not adjusted for seasonal variations), which is nearly unchanged from 29,000 in August 2016 and down from 39,000 in September 2015. This level represents only 2.1% 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 16,000 in October, down from roughly 20,000 each in August and September, albeit up from July’s multi-year trough of 11,000 (then linked to the summer holiday season). 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 13.8% y/y in November. This is similar to increases of 13.3% y/y in October and also a quarter ago in August, but up markedly from much more limited increases during the first half of 2016. The degree of government support and thus dampening effect on registered unemployment has picked up during 2016, reversing the diminishing tendency that had been observed for years until end-2015. Indeed, a separate statistic showing underemployment as opposed to unemployment reveals that the former increased (seasonally adjusted) by 1,000 m/m in November. On the bright side, underemployment had even increased by 10,000 per month on average since March, reflecting not least the greatly increased refugee inflow since mid-2015. In that sense the narrowing gap between unemployment and underemployment at the data edge in November is encouraging.

 

Meanwhile, seasonally adjusted employment – data for which lags unemployment by one month – increased 13,000 in October, leading to a level of 43.55 million. The improvement to an increase of 28,000 in September – following a summer lull (cumulative decline by 11,000 during July-August) – has thus experienced a moderate setback. Overall, the Labour Agency say that employment growth has been slowing down since June. Indeed, the average employment increase of just 10,000 during June-October compares with an average monthly pace of 42,000 between December 2014 and May 2016. The latter had been remarkable in the sense that this broadly matched the average pace of 2010-11, a time when German GDP growth had been about 4% and not less than half of that as during 2015 and the first half of 2016. In cumulative terms, the latest level of employment is now 2.51 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 0.64 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.

 

Seasonally adjusted vacancies increased 3,000 in November, down from a monthly average of 8,000 in 2015 and 6,000 in the year to date. The upward trend observed since mid-2013 nonetheless remains intact for now. Vacancies reached a new cyclical and also all-time peak of 678,000 in November. 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 in 2017 as more and more asylum seekers obtain right of residence, although by the same token unemployment will also increase modestly as an increasing number of refugees attempt to enter the labour market following the completion of qualification measures (language skills; specific work skills). Administrative lags involved in processing asylum applications have meant that German labour market statistics are only now starting to reflect the refugee surge that started around mid-2015. 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 economy enjoys ongoing support from sharply lower oil price levels than until mid-2014, a soft euro, and the ECB’s ongoing policy of quantitative easing.

 

Following GDP growth of only 0.6-0.7% in 2012-13, acceleration to a range of 1.5-2.0% has been observed since 2014. Notwithstanding modest dampening effects from Brexit, the latest IHS forecast published in mid-November foresees growth of 1.8% in 2016 and 1.7% in 2017. The encouraging signals from leading indicators (notably the Ifo business climate survey and the PMI indices) since September suggest that growth will accelerate in late 2016, potentially even pushing average growth in 2017 towards the 2% level. Construction output and public consumption, the latter also reflecting refugees’ subsistence needs, will remain supportive elements that are not affected by any 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 modestly above capacity in the foreseeable future. Owing to the refugee factor – given rising numbers being officially granted asylum, completing qualification measures, and then looking for work – IHS nonetheless expects headline unemployment to start rising gradually during the coming months. From 6.0% at present, the unemployment rate should increase to around 6.2% during 2018-19. 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.

Timo Klein Principal Economist | IHS Markit Economics