IHS Markit analysis: German labour market report does not indicate any near-term end to improving trend

Frankfurt/Main (30.8.18) – In August, seasonally adjusted German unemployment declined by 8,000 month-on-month (m/m) to a fresh record low of 2.330 million. Although downward momentum has been waning since April, there is no sign of an imminent end to the trend of declining joblessness that has been ongoing since mid-2009. The average monthly drop during the first eight months of 2018 has been 14,000, which compares with 16,000 in 2017, 10,000 in 2016, and only 2,000 during a four-year period between January 2012 and October 2015. 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 2.33 million in August 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 kept steady at 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 June, 16,000 employees were affected (not adjusted for seasonal variations), following 12,000 in May 2018 and 22,000 in June 2017. This level represents only 1.1% of the peak of 1.44 million seen in May 2009. Furthermore, the Agency estimates new applications for (cyclical) short-time work at 22,000 in July, up markedly from 6,000 in June and 7,000 in May. This increase is related to developments at a single firm. 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 -4.8% y/y in August, the annual decline thus diminishing further (it was -6.5% in July and for instance -8.8% in May). The degree of government support – and thus dampening effect on registered unemployment – is therefore continuing to be curtailed, but less so than in late 2017.

 

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 a decline by 18,000 in August, more than twice the drop in headline unemployment. Underemployment has been declining at a faster pace than unemployment throughout 2018 so far, reflecting the Labour Agency’s leeway to scale back support measures. This contrasts with the pattern during much of 2016 and early 2017, when the large refugee inflow of 2015-16 necessitated a temporary increase in government measures.

 

Meanwhile, seasonally adjusted employment (data for which lags unemployment by one month) increased 46,000 to a level of 44.876 million in July, matching the average of the first half of 2018. That said, there was a major spike in employment around the turn of the year (November 2017 to January: up by 86,000 per month) and a corrective sub-average monthly increase during February-June (31,000). July’s increase exceeds the average pace of 40,000 observed since the start of the upward trend of the latest cycle in March 2010.  In cumulative terms, the latest level of employment is now 3.84 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 0.97 million in this period, implying a major increase of the labour force by almost 3 million people.

 

Seasonally adjusted vacancies were unchanged at 803,000 in August, an all-time peak. 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, the German labour market seems largely unfazed by growing international uncertainty since mid-2016 linked to Brexit and disruptive US trade policies under President Trump. 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.

 

The pace of quarterly GDP growth has slowed down from a buoyant 0.7% q/q in 2017 to 0.4% during the first half of 2018. This has been heralded by downward corrections of key leading indicators (Ifo, PMI, ZEW) since late 2017. However, the hard monthly frequency data such as production, exports, and retail sales have stabilized or even rebounded since May, and German construction output and public consumption will remain supportive elements quite independent of international developments. Furthermore, private consumption benefits not only from the low level of job insecurity but also from above-average wage settlements and pension increases in recent months. Overall, with Germany’s rate of potential growth being 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 1.2% y/y in 2018 before slowing somewhat to 0.7% in 2019 given the increasing skills shortage.

 

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