German labour market continues to improve despite recent GDP contraction, according to November report

Frankfurt/Main (29.11.18) I n November, seasonally adjusted German unemployment declined by 16,000 month-on-month (m/m) to a fresh record low of 2.276 million, thus still failing to signal any imminent end to the 9-year trend of declining joblessness despite the contraction in GDP observed in the third quarter. The average monthly drop during the first eleven 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 almost four times the size of the average pace of unemployment declines in the same period (-11,000), 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 2.28 million in November 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 declined from 5.1% to 5.0%, a fresh record low for post-unification times and less than half its 2005 peak of 12%. The latest (extrapolated) Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain quite benign. At the data edge in September, 25,000 employees were affected (not adjusted for seasonal variations), following 19,000 in August 2018 and 16,000 in September 2017. This level represents only 1.7% of the May 2009 peak of 1.44 million. Furthermore, the Agency estimates new applications for (cyclical) short-time work at 14,000 in October, up only slightly from 12,000 in September. 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 -0.3% y/y in November, which is comparable to the decline in October (-1.2%) but a much smaller drop than a quarter earlier in August (-5.3%). 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 18,000 in November, similar to the drop of headline joblessness. During much of 2018, underemployment has been falling faster than unemployment, reflecting a scaling back of the Labour Agency’s support measures. This unwound the refugee related increase 2016-17. It appears that this unwinding development is now petering out as the level of government support is steadying.

 

Meanwhile, seasonally adjusted employment (data for which lags unemployment by one month) increased 37,000 to a level of 44.975 million in October, 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 3.94 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 1.01 million in this period, implying a major increase of the labour force by almost 3 million people.

 

Seasonally adjusted vacancies have declined for the second consecutive month in November, however, albeit only marginally by 1,000 to 802,000. The last time that vacancies retreated was in May 2014. In September, vacancies had reached 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 a falling GDP level in the third quarter and a 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 been slowing during 2018, even turning negative in Q3. The latter largely owed to one-off factors, however (reduced car output due to the introduction of a new emissions test procedure that has temporarily subdued sales; a drought that led to logistical problems as low river levels inhibited transports of inputs), which will unwind in the two subsequent quarters. Underlying GDP growth momentum is also supported by construction and public consumption, which benefit from structural factors and budget surpluses, respectively. Furthermore, private consumption will be helped by the recent drop in oil prices, allowing the beneficial effects of high job security and this year’s above-average wage and pension increases to come to the fore again. 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 close to capacity in 2019.

 

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% or even 4.9% in 2019. In ILO (harmonized) terms, this corresponds to a decline from 3.8% in 2017 to 3.4% in 2018 and 3.2% 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