IHS Markit Economics: German unemployment reaches new historic low in post-unification times in May

 

Frankfurt/Main (31.5.17) – In May, seasonally adjusted German unemployment declined by 9,000 month-on-month (m/m) to 2.536 million, a fresh record low since German re-unification in 1990. Although the latest drop is only about half of what was observed during the six months preceding May (then partly aided by a mild winter), it broadly matches the monthly average of 10,000 during 2016. Unemployment has been enjoying a downward trend since mid-2009, interrupted only twice by modest upward corrections between April 2012 and November 2013 (by 82,000 in net terms) and in May/June 2014 (by 22,000).

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 December 2011 had been -20,000, followed by near-stagnation (only -2,000 per month) in the almost four years thereafter (until October 2015). Since November 2015, the pace of decline in joblessness has newly accelerated to 13,000 per month. By contrast, employment has been increasing almost without interruption since March 2010, posting an average monthly increase of 39,000. This is almost four times the size of the average pace of unemployment declines in this seven-year 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 in recent years.

 

The adjusted level of joblessness of 2.54 million in May 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 anew from 5.8% to a record low for post-unification times of 5.7% (since 1992). The unemployment rate had been fluctuating in a narrow band of 6.7-7.0% for three years starting in September 2011, but started a fresh downward trend in October 2014. The latest (extrapolated) Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain benign. In March, the latest month for which such data is available, 35,000 employees were affected (not adjusted for seasonal variations), down from 36,000 in the previous month and from 52,000 in March 2016. This level represents only 2.4% 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 just 13,000 in April, hardly changed from 12,000 in March and 14,000 in February. 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) were up by 7.2% y/y in May, down from 11.7% y/y in April and even 14.9% y/y a quarter earlier in February. The degree of government support and thus dampening effect on registered unemployment, which had been picking up temporarily during 2016, now appears to be returning to the diminishing tendency again that had already been observed for several years until end-2015. A separate statistic showing underemployment as opposed to unemployment reveals that the former actually posted a relatively larger decline by 13,000 m/m in May (seasonally adjusted), unlike the preceding months in which underemployment data was less benign than the development of headline unemployment. In that period, the ramifications of the large refugee inflow in 2015 had made itself felt, but the impact appears to be waning now.

 

Meanwhile, seasonally adjusted employment – data for which lags unemployment by one month – increased 31,000 in April, leading to a level of 44.11 million. The average monthly increase since July 2016 is 56,000, which clearly exceeds the pace of 36,000 observed between the start of the upward trend in March 2010 and mid-2016. Following large upward revisions published three months ago, the Labour Agency explicitly took back their previous assessment that employment dynamics slowed during 2016, instead saying that any reduction for demographic reasons (declining indigenous population, ageing) has been fully offset by rising labour participation. In cumulative terms, the latest level of employment is now 3.08 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 0.76 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.

 

Seasonally adjusted vacancies are continuing to increase, having encountered brief stagnation during February/March. They increased by 6,000 to 710,000 in May, a fresh all-time peak. During the almost four years starting in mid-2013, vacancies have been rising at an average monthly pace of also 6,000. Note that 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 remarkably healthy in Germany, having been hurt only very mildly by the Eurozone debt crisis during 2012-13 or the political uncertainty during the second half of 2016 linked to the Brexit event and the unexpected US election result. 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 in 2017-18 as more and more asylum seekers obtain right of residence. In fact, the upward impulses to unemployment previously expected 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) may actually not even lead to a rebound in overall joblessness. Administrative lags involved in processing asylum applications have always meant that German labour market statistics would only be reflecting the refugee surge that started around mid-2015 with a delay of one-and-a-half to two years, but even now there is little sign of such an impact. Meanwhile, the construction sector enjoys structurally robust demand conditions, partly related to the sharp increase in immigration but also due to government policies encouraging additional investment in infrastructure. The economy enjoys ongoing support from sharply lower oil price levels than until mid-2014, a soft euro, and the ECB’s ongoing policy of quantitative easing.

 

Following GDP growth of only 0.6-0.7% in 2012-13, acceleration to a range of 1.5-2.0% has been observed since 2014. The latest IHS Markit forecast published in mid-May foresees growth of 2.0% in both 2017 and 2018, as suggested by further increases in leading indicators lately (notably the Ifo business climate survey and manufacturing PMI). In addition to an improving global economic environment, especially in Europe, German construction output and public consumption will remain supportive elements quite independent of international developments. As we estimate Germany’s current rate of potential growth to be in a range of 1.25-1.50%, the German economy will thus run somewhat above capacity during 2017-18. Owing to the refugee factor – given rising numbers being officially granted asylum, completing qualification measures, and then looking for work – IHS Markit still expect progress regarding the decline in headline unemployment to stall later this year, but the previously held view that joblessness will show a temporary rebound is increasingly waning. In annual average terms, the unemployment rate is likely to slip from 6.1% in 2016 to 5.7% in 2017 and stabilize around this level in 2018-20 before resuming its long-term downward trend. Meanwhile, employment will continue to show solid growth – for a country with Germany’s demographics – of more than 1% until at least mid-2018.

 

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. The working-age population and also labour supply will not decline any time soon, instead increasing further at least for several years.

Timo Klein  Principal Economist | IHS Markit Economics,  Bleichstr. 1 | 60313 Frankfurt,

P: +49 69 20973 324,  timo.klein@ihsmarkit.com