Germany: German labour market continues to defy economic slowdown, according to October report –

by Timo Klein 

Frankfurt/Main (30.10.18) – In October, seasonally adjusted German unemployment declined by 12,000 month-on-month (m/m) to a fresh record low of 2.292 million, failing to signal any imminent end to the trend of declining joblessness ongoing since mid-2009. The average monthly drop during the first ten 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 2.29 million in October 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 remains at the previous month’s 5.1%, 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 very benign. At the data edge in August, 22,000 employees were affected (not adjusted for seasonal variations), following 17,000 in July 2018 and 15,000 in August 2017. This level represents only 1.5% of the May 2009 peak of 1.44 million. Furthermore, the Agency estimates new applications for (cyclical) short-time work at 12,000 in September, down from 14,000 in August. 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 -2.7% y/y in October, the annual decline thus similar as in September (-2.9%) but clearly smaller than a quarter earlier in July (-7.1%). The degree of government support – and thus dampening effect on registered unemployment – is continuing to be curtailed compared to a year ago, 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 9,000 in October, i.e. slightly less than headline joblessness. This constellation was already seen in September, reversing the tendency previously seen in 2018 of underemployment falling faster than unemployment. The latter had reflected a scaling back of the Labour Agency’s support measures – unwinding the refugee related increase 2016-17 – and it appears that the level of support is now steadying.

 

Meanwhile, seasonally adjusted employment (data for which lags unemployment by one month) increased 39,000 to a level of 44.938 million in September, in keeping with the average monthly increase in recent months and also the average 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 3.90 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 1.00 million in this period, implying a major increase of the labour force by almost 3 million people.

 

Seasonally adjusted vacancies posted their first monthly decline since May 2014, however, slipping by 5,000 to 802,000 in October. September had marked an all-time high of 807,000, which compares with a cyclical low of 282,000 in July 2009.

 

The German labour market continues to remain surprisingly robust given the multitude of negative external factors at play presently (Brexit uncertainty, protectionist US trade policy, Italy’s clash with EU over fiscal policy). Unemployment has enjoyed a downward trend for almost ten years now, which 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 nonetheless slowed down from a buoyant 0.7% q/q in 2017 to 0.4% during the first half of 2018. That said, 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 or at least close to 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 in the foreseeable future. In annual average terms, the unemployment rate based on registered joblessness should slip from 5.7% in 2017 to 5.2% in 2018 and 5.0% in 2019. In ILO (harmonized) terms, this corresponds to a decline from 3.8% in 2017 to 3.4% in 2018 and 3.3% in 2019. Meanwhile, employment will continue to show robust growth – for a country with Germany’s demographics – of 1.3% y/y in 2018 before slowing to 0.9% 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