IHS Global: Pace of decline of German adjusted unemployment

unexpectedly accelerates in March alongside persistently robust employment growth

 

Frankfurt/Main (31.3.17) – In March, seasonally adjusted German unemployment declined by 30,000 month-on-month (m/m) to 2.556 million, a fresh record low since German re-unification in 1990. This is the largest decline in a single month during the past five-and-a-half years and it compares with an average decline of only 10,000 per month in 2016. Unemployment has been enjoying a downward trend since mid-2009, interrupted only twice by modest upward corrections between April 2012 and November 2013 (by 82,000 in net terms) and in May/June 2014 (by 23,000).

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 -13,000 per month over the past seventeen months. By contrast, employment has been increasing almost without interruption since March 2010, posting an average monthly increase of 38,000. This is almost four times the size of the average pace of unemployment declines in this period (-10,000), 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 2.56 million in March 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 a new record low for post-unification times of 5.8% (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 started a fresh downward trend in October 2014. The latest (extrapolated) Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain benign. In January, the latest month for which such data is available, 34,000 employees were affected (not adjusted for seasonal variations), up from 29,000 in the previous month but down from 48,000 in January 2016. This level represents only 2.4% 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 just 14,000 in February, following 21,000 in January and 15,000 in December. Separately, 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 13.9% y/y in March, down from 15.4% y/y in February and similar to the 13.8% increase a quarter earlier in December. The degree of government support and thus dampening effect on registered unemployment had been picking up during 2016, reversing the diminishing tendency that had been observed for several years until end-2015, but this now seems to be topping out. A separate statistic showing underemployment as opposed to unemployment reveals that the former only declined (seasonally adjusted) by 18,000 m/m in March and 11,000 m/m in February (some 9,000 less on average than the drop in headline unemployment). The gap between underemployment and unemployment had been even larger during much of 2016, partly reflecting the greatly increased refugee inflow since mid-2015. In that sense the return even of underemployment data to an accelerating downward trend is encouraging.

 

Meanwhile, seasonally adjusted employment – data for which lags unemployment by one month – increased 50,000 in February, leading to a level of 44.01 million. Unlike a month ago, there were only minor revisions this time. The average monthly increase since July 2016 is now 57,000, which clearly exceeds the pace of 36,000 observed between the start of the upward trend in March 2010 and mid-2016. A month ago, the Labour Agency explicitly took back their previous assessment that employment dynamics have slowed during 2016, instead saying that any reduction for demographic reasons (declining indigenous population, ageing) has been fully offset by rising labour participation. In cumulative terms, the latest level of employment is now 2.97 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 0.72 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.

 

By contrast, seasonally adjusted vacancies are no longer increasing, as had been the case between mid-2013 and end-2016. They stagnated at a level of 691,000 in March, having set an all-time peak of 692,000 in January. During the three-and-a-half years starting in mid-2013, vacancies had been rising at an average monthly pace of 6,000. Note that 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 remarkably healthy in Germany, having been hurt only very mildly by the Eurozone debt crisis during 2012-13 or the political uncertainty during the second half of 2016 linked to the Brexit event and the unexpected US election result. 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 2017-18 as more and more asylum seekers obtain right of residence. As yet, the upward impulses to unemployment that had been expected by now from an increasing number of refugees who are attempting to enter the labour market following the completion of qualification measures (language skills; specific work skills) have not actually been realized. Administrative lags involved in processing asylum applications have always meant that German labour market statistics would only be reflecting the refugee surge that started around mid-2015 with a delay of one-and-a-half to two years, but even now there is little sign of such an impact. 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. The latest IHS Markit forecast published in mid-March foresees growth of 1.9% in 2017, up slightly from 1.8% in 2016. The encouraging signals from leading indicators (notably the Ifo business climate survey and the PMI indices) since September 2016 suggest that growth has been accelerating further in early 2017. 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 somewhat above capacity during 2017 and likely also 2018. Owing to the refugee factor – given rising numbers being officially granted asylum, completing qualification measures, and then looking for work – IHS Markit still expect headline unemployment to eventually bottom out and potentially even rise slightly. In annual average terms, the unemployment rate is likely to slip from 6.1% in 2016 to 5.8% in 2017, but to edge back up to slightly below 6.0% by 2019. This anticipated mild deterioration of the unemployment statistic should nonetheless go hand-in-hand with further solid 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. –

Von Timo Klein, Principal Economist / IHS Markit Economics