IHS: German labour market improvement continues apace at the start of 2018

Frankfurt/Main (31.1.18) – In January, seasonally adjusted German unemployment declined by 25,000 month-on-month (m/m) to 2.415 million, a fresh record low in post-unification times (since 1990). Monthly declines have even shown an accelerating tendency in recent months as the average drop by 25,000 during November-January compares to only -14,000 during January-October 2017 and -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 81,000 in net terms) and in May/June 2014 (by 20,000). 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 13,000 per month. Meanwhile, 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 near-eight-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 2.415 million in January 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 fell further from 5.5% to 5.4%, a record low for post-unification times. The unemployment rate had been fluctuating in a narrow band of 6.7-7.0% between June 2011 and September 2014 before resuming the long-term downward trend that began at 12% back in 2005. The latest (extrapolated) Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain benign. In November, the latest month for which such data is available, 19,000 employees were affected (not adjusted for seasonal variations), up from 15,000 in the previous month but down from 40,000 in November 2016. This level represents only 1.3% of the peak of 1.44 million seen in May 2009. Furthermore, the Agency estimates new applications for (cyclical) short-time work at 17,000 in December, up from 6,000 in November and 7,000 in October – this increase is due to a single firm (likely a car manufacturer). 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) posted -6.0% y/y in January, similar to -6.1% y/y in December and -5.8% y/y a quarter earlier in October. The degree of government support – and thus dampening effect on registered unemployment – is being curtailed steadily. A separate statistic showing underemployment as opposed to unemployment reveals that the former declined by 28,000 m/m in January (seasonally adjusted), slightly more than headline unemployment. This contrast with the pattern of less benign underemployment data seen during much of 2016 and early 2017, then reflecting ramifications of the large refugee inflow in 2015.

 

Meanwhile, seasonally adjusted employment (data for which lags unemployment by one month) increased 67,000 in December. Along with an upward revision to recent levels by roughly 30,000, the December level thus stands at 44.58 million. December’s monthly increase clearly exceeds the average pace of 40,000 observed since the start of the upward trend of the latest cycle in March 2010, underlining current momentum of job creation. In cumulative terms, the latest level of employment is now 3.54 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 0.86 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 only 2,000 in January, offsetting December’s above-average rise of 15,000. The latest level of 786,000 represents an all-time peak. The average monthly increase in vacancies has been 9,000 during the last ten months, almost twice as high as the average pace of 5,000 observed between the start of the latest rebound in mid-2013 and March 2017. 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 subsequent years as more and more asylum seekers obtain right of residence. In fact, the upward impulses to unemployment 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) are being overcompensated by the inherent downward tendency 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 recent data prove that this factor is far too weak to cause a general turnaround towards rising unemployment. 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. Germany’s research institutes recently even warned against an overheating labour market in the construction sector.

 

Following GDP growth of only 0.6-0.7% in 2012-13, this accelerated to a range of 1.5-2.0% during 2014-16 and roughly 3% in 2017. The latest IHS Markit forecasts published in mid-January foresee growth of 2.8% in 2018, up from a preliminary official figure of 2.5% in 2017. This bright outlook continues to be supported by very elevated leading indicators. The Ifo business climate index returned to its November 2017 all-time high in January, and while manufacturing PMI suffered a setback in January after December’s survey high, service-sector improvement was able to compensate. 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 continue to run well above capacity in 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 the trend decline in headline unemployment to slow down eventually during 2018, but an actual rebound of the unemployment rate seems most unlikely now during 2018-19. In annual average terms, the unemployment rate should slip from 5.7% in 2017 to 5.2% in 2018 and 5.0% in 2019. Meanwhile, employment will continue to show solid growth – for a country with Germany’s demographics – of more than 1% throughout 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. Neither the working-age population nor labour supply will decline any time soon, instead increasing further at least for several years.-

Best regards,  Timo Klein