Pace of decline in German unemployment unexpectedly gathers fresh momentum in September – by Timo Klein

Frankfurt/Main (28.9.18) – In September, seasonally adjusted German unemployment declined by 23,000 month-on-month (m/m) to a fresh record low of 2.303 million. Downward momentum has thus accelerated again after the slowdown of recent months, arguing against any near-term end to the trend of declining joblessness ongoing since mid-2009. The average monthly drop during the first nine months of 2018 has been 15,000, broadly matching the pace of 16,000 in 2017 and clearly exceeding the much more muted pace of 4,000 per month during 2012-16. 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 the same 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 since 2010.

 

The adjusted level of (registered) joblessness of 2.30 million in September 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 now fallen to 5.1%, a new 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 July, 14,000 employees were affected (not adjusted for seasonal variations), following 12,000 in June 2018 and 18,000 in July 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 14,000 in August, down from 22,000 in July (outlier related to a single firm) and up from 6,000 in June. 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 -5.2% y/y in September, the annual decline thus similar to August (-4.9%) but less than a quarter earlier in June (-8.0%). The degree of government support – and thus dampening effect on registered unemployment – is continuing to be curtailed, but there is a steadying tendency at the data edge.

 

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 17,000 in September, i.e. less than headline joblessness. This reverses the tendency seen in 2018 so far of underemployment falling faster than unemployment, then reflecting the Labour Agency’s leeway to scale back support measures and contrasting with the refugee related increase in government support during much of 2016 and early 2017. It remains to be seen whether this is only a one-off, however.

 

Meanwhile, seasonally adjusted employment (data for which lags unemployment by one month) increased 31,000 to a level of 44.907 million in August, in keeping with the average monthly increase in recent months. The August increase is moderately smaller than 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 3.87 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 0.98 million in this period, implying a major increase of the labour force by almost 3 million people.

 

Seasonally adjusted vacancies increased by 6,000 to a new all-time peak of 811,000 in September. 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.

 

The German labour market continues to remain very robust in the face of elevated international uncertainty since mid-2016 linked to Brexit and disruptive US trade policies under President Trump. The nine-year downward trend of unemployment is 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 very strong structural demand, partly related to the sharp increase in immigration but also due to government policies encouraging additional investment in infrastructure.

 

Heralded by downward corrections of key leading indicators (Ifo, PMI, ZEW) since late 2017, 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. That said, monthly frequency data such as production, exports, and retail sales have broadly stabilized on balance around mid-2018, 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. Notwithstanding the ongoing inflow of refugees entering the labour market – following the granting of asylum and the completion of qualification measures – IHS Markit still expect the trend decline in headline unemployment to continue at least through 2019. 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