IHS Global: Improvement in German labor market shows slowing tendency at data edge in May/June

Frankfurt/Main (1.7.15) – Seasonally adjusted German unemployment declined just marginally by 1,000 month-on-month (m/m) in June, nevertheless thus establishing yet another post-unification and 24-year low. The pace of decline has slowed in recent months, from -21,000 per month on average during the final quarter of 2014 and -14,000 in the first quarter to -5,000 in the second.

Nevertheless, the underlying downward tendency existing since mid-2009 remains intact for now. The two interim upward corrections seen during the past six years – initially between April 2012 and November 2013 (by 92,000 overall) and, following a fresh drop by 80,000 between December 2013 and April 2014, during May-September 2014 (only 19,000 cumulatively) – have been quite mild in comparison. The mid-2014 upward correction had been due to stagnating GDP growth at the time, exacerbated by a recoil effect linked to an unusually mild winter and late timing of the summer holidays. Importantly, even during the more pronounced increase in unemployment during 2012-13 there had been a large concurrent increase in the labour force, rendering the very limited reaction of unemployment to the slowdown in GDP growth quite remarkable and also helping to explain why employment continued to increase steadily in this time. With respect to unemployment, the average monthly decline between mid-2009 and the initial trough in March 2012 had been -19,000, somewhat more pronounced than the average pace of -13,000 observed during the last nine months. At the same time, employment has been increasing almost without interruption since late 2009, posting an average monthly increase of 30,000 during the past five-and-a-half years. This is triple the size of the average pace of unemployment declines in this period, which demonstrates the robustness of the upward trend in the size of the labour force and therefore the extent of the underlying improvement in the labour market in recent years.

The adjusted level of joblessness was 2.79 million in June, establishing a new all-time low since Germany was unified in 1990. The latest level 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 in June has remained at a post-unification record low of 6.4%. The unemployment rate had been fluctuating in a narrow band of 6.7-6.9% for three years starting in September 2011, but has been moving yet lower since last October. The latest Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain quite benign. In April, the latest month for which such data is available, 46,000 employees were affected (not adjusted for seasonal variations), which is 4,000 less than in March and 14,000 less than in April 2014. This level represents only 3% of the peak of 1.44 million seen in May 2009. Meanwhile, new applications for (cyclical) short-time work are estimated by the Agency at a very low 16,000 in May, following 27,000 in April and 20,000 in March. Furthermore, the Agency states that the number of people benefiting from so-called active labour market policy measures (including that involving the activity of private firms) declined -1.5% y/y in June, which is down from -1.1% y/y in May and -1.0% a quarter earlier in March. This means that the degree of government support and thus relief effect for registered unemployment retains a diminishing tendency at the data edge.

Meanwhile, employment growth, data for which lags unemployment by one month, lost momentum in May following an interim rebound during February-April from a sharp dip in January. Employment in May increased by 7,000 in seasonally adjusted terms to a level of 42.81 million, the monthly change matching the average of the first four months of 2015. This pales against the average increase of 33,000 during 2014 and 27,000 during the three-year period 2012-14. Prior to 2012, there had even been a phase between March 2010 and end-2011 in which the monthly increase averaged 46,000, which was linked to the post-Lehman economic recovery arriving in the labour market. In cumulative terms, the latest level of employment is now 1.77 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 0.52 million in this period. Note that during the recession in the first half of 2009, employment had already been falling by less than unemployment was increasing, as firms aimed to hold onto their existing workforce wherever possible at the time (utilizing short-time work schemes instead). In that phase, the labour force had thus been increasing but firms refrained from hiring. Since the economic recovery took hold from mid-2009 onwards, employment gains have persistently stayed ahead of declines in unemployment, signalling an ongoing increase in the labour force.

Seasonally adjusted vacancies have performed better than employment at the data edge, increasing by 8,000 to a new cyclical peak of 562,000 in June. This is almost double the average increase seen since the start of a fresh upward tendency in mid-2013. The upward trend in the previous cycle had begun at around 280,000 in mid-2009, leading to an interim high at 501,000 in January 2012, whereas the latest improvement had already started from a much higher low-point of 449,000 in June 2013.

Overall, labour market conditions remain healthier in Germany than in most other countries in Europe. The boosting effect that the Eurozone debt crisis had on German unemployment during 2012-13 was a very mild one that was already fully unwound by late 2014 despite a fresh interim setback in mid-2014 due to temporary GDP stagnation at the time. This phase of stalling growth had left only a small dent in the persisting underlying downward tendency for joblessness, and German consumer demand has consequently been hardly harmed. At the same time, employment developments have additionally been helped by the ongoing increase in the labour force, not least due to rising migration from troubled Eurozone countries and Eastern Europe. The construction sector enjoys structurally robust demand conditions, partly related to rising immigration in recent years but also due to government policies encouraging additional investment in infrastructure. Overall, underlying German economic growth will remain quite robust during 2015-16 despite Eurozone concerns about how the Greek drama plays out and about geopolitical crises in the Ukraine and in Iraq/Syria (threat from IS). Sharply lower oil price levels than until mid-2014, a much softer euro, and the ECB’s launch of a quantitative easing program in March are all providing support for economic activity at present.

Following only 0.2% in 2013, GDP growth has already accelerated to 1.6% in 2014 and IHS June forecasts look for 1.8% in 2015 and 2.2% in 2016 in calendar-adjusted terms (even 2.0% and 2.3%, respectively, in unadjusted terms, the format used by the German government in its projections). This expectation of ongoing robust growth momentum holds despite the May/June setback to the Ifo business climate indicator after a six-month rebound during November-April, a view that is underpinned by the rebound of PMI data in June. Furthermore, the full stimulating impact of the softer euro on German exports has only just started to unfold during Q2. Growth in 2015-16 is thus expected to exceed Germany’s current rate of potential growth of just under 1.5%. For unemployment in annual average terms, this should mean a decline from 6.7% in 2014 to 6.4% or even 6.3% in 2015 and 6.1% in 2016. Eurozone debt crisis developments linked to Greece and the geopolitical uncertainty created by the Ukraine-Russia stand-off remain background risk factors for the economic and thus also labour market outlook, but only in case the Greek situation gets completely out of hand and has major contagion effects throughout Europe – which is not our baseline view despite significant political volatility – there could also be a significant negative impact on the German labour market.

Finally, a shift towards increased immigration since 2011 has changed demographic dynamics to some extent. Thus the working-age population and also labour supply will not decline as much or indeed as soon as previously anticipated. Other things equal, this will restrain the medium-term downward trend for German unemployment, but it should not reverse it as long as the labour market can create enough new jobs. This will remain the case in the foreseeable future.

Timo Klein Dipl. Volkswirt / Senior Economist