IHS: German labour market improvement continues in May despite signs of economic slowdown in recent months

 

Frankfurt/Main (30.5.18) – In May, seasonally adjusted German unemployment declined by 12,000 month-on-month (m/m) to 2.358 million, another record low in post-unification times (since 1990). Although downward momentum has been waning recently, joblessness thus continues to diminish. By comparison, the average monthly drop had been 16,000 in 2017 and 10,000 in 2016. The downward trend has been ongoing since mid-2009, encountering only modest setbacks during a phase between April 2012 and November 2013 and in May/June 2014. Even in those periods, the labour force had continued to increase markedly, rendering the very limited negative impact of the slowdown in GDP growth on unemployment and employment quite remarkable. The average monthly decline in unemployment had been -20,000 between mid-2009 and the initial trough in December 2011, 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 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 2.36 million in May 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 fallen to 5.2%, a record low for post-unification times and less than half its 2005 peak at 12%. The latest (extrapolated) Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain extremely benign. At the data edge in March, 14,000 employees were affected (not adjusted for seasonal variations), following 13,000 in February 2018 and 40,000 in March 2017. This level represents only 1.0% of the peak of 1.44 million seen in May 2009. Furthermore, the Agency estimates new applications for (cyclical) short-time work at 7,000 in April, hardly changed from 8,000 in March and February. 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 -8.9% y/y in May, very similar to the annual decline in recent months.  The degree of government support – and thus dampening effect on registered unemployment – is therefore being curtailed steadily. Indeed, a separate statistic showing seasonally adjusted underemployment as opposed to unemployment – the former also including those who receive some government support despite having a job – reveals that this has been declined relatively more since January. In May, underemployment declined by 17,000 m/m as opposed to the smaller headline drop by 12,000. This contrasts with the pattern of less benign underemployment data during much of 2016 and early 2017, then reflecting an increase in government measures in order to cope with the large refugee inflow in 2015.

 

Meanwhile, seasonally adjusted employment (data for which lags unemployment by one month) increased 35,000 to a level of 44.744 million in April. This remains close to the average pace of 40,000 observed since the start of the upward trend of the latest cycle in March 2010, and the YTD average increase of 51,000 even exceeds it. In cumulative terms, the latest level of employment is now 3.7 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 0.93 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 5,000 in May, posting fresh acceleration after only marginal increases during January-April. The latest level of 793,000 represents an all-time peak, and an end is not in sight yet. The upward trend had begun at around 280,000 in mid-2009 (little more than a third of current levels), leading to an interim high at 501,000 in January 2012 before correcting temporarily to an interim trough of 449,000 in June 2013.

 

Overall, labour market conditions remain healthy in Germany, having been hurt only mildly by the Eurozone debt crisis during 2012-13 or the political uncertainty since mid-2016 linked to the Brexit event and the subsequent onset of the Trump presidency in the US. 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, partly due to rising migration from troubled Eurozone countries and Eastern Europe and partly from the surge in the refugee influx from the war-torn Middle East during 2015-16. Any 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 still being overcompensated by the inherent downward tendency in overall joblessness.  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. Last autumn, Germany’s research institutes warned about an overheating labour market in the construction sector.

 

GDP growth, which has accelerated from just 0.6-0.7% in 2012-13 to a recent peak near 3%, now looks to be slowing down somewhat. This follows from some fairly pronounced downward corrections of key leading indicators and also various disappointing production, export, and retail sales data since the start of 2018. That said, the Ifo business climate index stabilized in May and retail sales recovered sharply in April. Furthermore, German construction output and public consumption will remain supportive elements quite independent of international developments. Overall, with Germany’s rate of potential growth in a range of roughly 1.25-1.50%, the German economy will continue to run above capacity in the near term. 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 further during the remainder of 2018, but not to reverse.  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 robust growth – for a country with Germany’s demographics – of roughly 1.3% y/y in 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