IHS Markit: German unemployment resumes downward trend

in July following one-off bounce in June

 

Frankfurt/Main (1.8.17) – In July, seasonally adjusted German unemployment declined by 9,000 month-on-month (m/m) to 2.537 million, more than unwinding June’s first monthly rise (up 6,000) since March 2016. As suspected a month ago, June’s rebound was a one-off event attributable to a recoil effect linked to above-average declines during the wintertime because of the mild weather. Joblessness in July thus represents a fresh record low in post-unification times, i.e. since 1990. Note that the average monthly decline in 2017 so far has been 13,000, still exceeding the monthly average drop of 10,000 during 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 20,000). 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 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 December 2011 had been -20,000, followed by near-stagnation (only -2,000 per month) in the almost four years thereafter (until October 2015). Since November 2015, the pace of decline in joblessness has newly accelerated to 11,000 per month. By contrast, employment has been increasing almost without interruption since March 2010, posting an average monthly increase of 40,000. This is four times the size of the average pace of unemployment declines in this seven-year 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 2.54 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 stayed put at 5.7%, a record low for post-unification times. The unemployment rate had been fluctuating in a narrow band of 6.7-7.0% for three years starting in September 2011, but then started a fresh downward trend in October 2014 that remains intact. 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, 26,000 employees were affected (not adjusted for seasonal variations), down from 30,000 in the previous month and 45,000 in May 2016. This level represents only 1.8% 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 just 8,000 in June, down from 11,000 in May and 13,000 in April. 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 only 1.5% y/y in July, down from 3.1% y/y in June and even 11.4% y/y a quarter earlier in April. The degree of government support and thus dampening effect on registered unemployment, which had been picking up temporarily during 2016, has thus returned to a diminishing tendency during 2017 – as previously already observed for several years until end-2015. A separate statistic showing underemployment as opposed to unemployment reveals that the former declined by 8,000 m/m in July (seasonally adjusted), essentially now running in parallel to headline unemployment. This contrasts with much of 2016 and early 2017, when underemployment data was less benign than the development of headline unemployment due to ramifications of the large refugee inflow in 2015. This effect has run its course now.

 

Meanwhile, seasonally adjusted employment (data for which lags unemployment by one month) increased 46,000 in June, leading – in combination with an upward revision to recent data to the tune of 70,000 – to a level of 44.27 million. This increase is in line with recent months. While not being able to match the average monthly increase during the second half of 2016 (up 58,000), it does exceed the pace of 37,000 observed between the start of the upward trend in March 2010 and mid-2016. Employment dynamics remain strong, the Labour Agency recently emphasizing 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 3.23 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 0.76 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 are maintaining a faster upward pace now, having briefly stagnated during February-March. They increased by 11,000 to 732,000 in July, a fresh all-time peak. During the four years starting in mid-2013, vacancies have 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 very healthy in Germany, having been hurt only 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 surge in the refugee influx (mostly from the war-torn Middle East) during 2015-16 will strengthen this tendency in 2017-18 as more and more asylum seekers obtain right of residence. In fact, the upward impulses to unemployment previously expected 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) may actually not lead to much of a rebound in overall joblessness. 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 the sharp increase in 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 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-July foresees growth of 2.0% in both 2017 and 2018, supported by further increases in leading indicators in recent months (although in July another record high of the Ifo business climate survey contrasted with a correction of manufacturing PMI data). In addition to an improving global economic environment, especially in Europe, German construction output and public consumption will remain supportive elements quite independent of 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 above capacity during 2017-18. Owing to the refugee factor – given rising numbers being officially granted asylum, completing qualification measures, and then looking for work – IHS Markit still expect an interruption to the trend decline in headline unemployment to occur in 2018, but not an actual deterioration towards significantly rebounding joblessness. In annual average terms, the unemployment rate is likely to slip from 6.1% in 2016 to 5.7% in 2017 and stabilize around 5.7-5.8% in 2018-20 before resuming its downward trend in the medium-term. Meanwhile, employment will continue to show solid growth – for a country with Germany’s demographics – of more than 1% until at least mid-2018.

 

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.

 

Best regards, Timo Klein HIS Markit