IHS Global: June report provides evidence of only gradual

loss of momentum in German labour-market improvement

 

Frankfurt/Main (30.6.16) – In June, seasonally adjusted German unemployment declined by 6,000 month-on-month (m/m) to 2.690 million, reaching yet another record low since German re-unification in 1990. This pace is about half that observed on average during the eight preceding months. Unemployment has been enjoying a downward trend since mid-2009 that has encountered only two interim upward corrections, specifically between April 2012 and November 2013 (by 87,000 overall) and, following a fresh drop by 70,000 between December 2013 and April 2014, one in May/June 2014 (by 24,000). The latter was more technical than cyclical in nature, given weather and holiday timing effects.

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. The average monthly decline in unemployment between mid-2009 and the initial trough in March 2012 had been -19,000, followed by near-stagnation (only -2,000 per month) in the three-and-a-half subsequent years until September 2015, and -11,000 per month during the last nine months. By contrast, employment has been increasing almost without interruption since late 2009, posting an average monthly increase of 35,000 during the past six-and-a-half years. This is almost four times the size of the average pace of unemployment declines in this period (-9,000), 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 of 2.69 million in June 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 fallen to 6.1%, the lowest level in the history of pan-German data (since 1992). 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 declining again since October 2014. The latest (extrapolated) Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain benign. In April, the latest month for which such data is available, 55,000 employees were affected (not adjusted for seasonal variations), little changed from 53,000 in March and 54,000 in April 2015. This level represents only 3.8% of the peak of 1.44 million seen in May 2009. Furthermore, new applications for (cyclical) short-time work are estimated by the Agency at only 16,000 in May, down from 24,000 in April and 19,000 in March (there had been a trough at around 12,000 in July/August 2015). Separately, however, 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) were up by 9.9% y/y in June, increasing markedly from 4.4% y/y in May and 0.0% y/y a quarter ago in March. This means that the degree of government support and thus relief effect for registered unemployment has picked up of late, reversing the diminishing tendency that had been observed until end-2015. Recent unemployment declines are therefore no longer market-driven. Indeed, a separate statistic showing underemployment as opposed to unemployment reveals that the former increased (seasonally adjusted) by 23,000 m/m in June, following 18,000 m/m in May. This partly reflects the refugee inflow now.

 

By contrast, employment, data for which lags unemployment by one month, continues to increase at a healthy clip. Following a phase with somewhat subdued momentum between mid-2014 and January 2015 (average monthly increase of 17,000), employment (seasonally adjusted) has since grown at an average monthly pace of 45,000. 45,000 is coincidentally also the increase at the data edge in May, leading to a level of 43.55 million. Interestingly, this pace of employment growth broadly matches that of 2010-11, a time when German GDP growth was almost 4% and not roughly 2% as at present. In cumulative terms, the latest level of employment is now 2.51 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 0.61 million in this period. Since the economic recovery took hold from mid-2009 onwards, employment gains have persistently stayed well ahead of declines in unemployment, signalling an ongoing increase in the labour force.

 

Growth in seasonally adjusted vacancies slowed down to 4,000 in June, having shown a one-off spike to 14,000 in May. This broadly matches the January-April average and is modestly below the 2015 average of 8,000 per month. The upward trend observed since mid-2013 remains intact. Vacancies have now reached a new cyclical and also all-time peak of 655,000. 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 quite healthy in Germany. 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. 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, not least due to rising migration from troubled Eurozone countries and Eastern Europe. The massive increase in the refugee influx (mostly from the war-torn Middle East) since mid-2015 will strengthen this tendency during 2016 as more and more asylum seekers obtain right of residence, although by the same token unemployment will soon also start increasing modestly given the sheer numbers of refugees and the need to raise their qualification levels first (which – on average – will take years). Given the administrative lags involved as authorities have been overwhelmed by the numbers, it was never likely that German labour market statistics would reflect this factor in a significant manner ahead of the second half of 2016. Meanwhile, the construction sector enjoys structurally robust demand conditions, partly related to sharply rising immigration but also due to government policies encouraging additional investment in infrastructure. The Brexit event will hurt German economic growth during the next several quarters, however, despite ongoing support by sharply lower oil price levels than until mid-2014, a soft euro, and the ECB’s (recently expanded) policy of quantitative easing.

 

Following only 0.4% in 2013, GDP growth has already picked up to around 1.5% during 2014-15, and the latest IHS forecast published in mid-June looked for modest further acceleration to 1.9% in 2016 and 2.0% in 2017. Indeed, healthy signals from leading indicators reflecting manufacturing sector conditions in general and export prospects in particular (specifically the PMI and Ifo business climate surveys) have been underpinning this outlook in recent months. Furthermore, construction output and public consumption, the latter also related to the need to care for refugees’ subsistence needs, will prove supportive for quite some time too. Unfortunately, however, the UK referendum that resulted in a decision to leave the EU has thrown a significant spanner into the works. This means that our forecasts for German GDP growth will need to be lowered to the 1.5% area for 2016 and to little more than 1% in 2017. The latter would be below the country’s rate of potential growth, which we estimate in a range of 1.25-1.50% at present. IHS thus now expects unemployment in annual average terms to start rising from a trough of 6.1% at present to at least 6.5% in 2017 and close to 7% in 2018. The growing impact from refugees who have been granted asylum status and are subsequently looking for work is also behind this increase. This anticipated deterioration of the unemployment statistic may nonetheless go hand-in-hand with further growth in employment and thus income, at least during 2016.

 

Finally, the general shift towards increased immigration since 2011, with considerably increased momentum observed during second-half 2015, is substantially changing demographic dynamics and thus the long-term outlook at present. Thus the working-age population and also labour supply will not decline any time soon, instead increasing further at least for several years.

Timo Klein, Dipl. Volkswirt, Principal Economist IHS Economics – Western Europe