German labour market improvement continues at reduced pace in April

 

Frankfurt/Main (27.4.18) – In April, seasonally adjusted German unemployment declined by 7,000 month-on-month (m/m) to 2.370 million. Although this is yet another record low in post-unification times (since 1990), downward momentum has been waning in recent months.  The size of monthly declines peaked at 29,000 in December and the average drop had been 16,000 in 2017 and 10,000 in 2016. Unemployment has been enjoying a downward trend since mid-2009, interrupted only briefly by modest upward corrections during a phase between April 2012 and November 2013 and in May/June 2014. Even in those periods, the labour force had continued to increase markedly, rendering the very limited negative impact of the slowdown in GDP growth on unemployment and employment quite remarkable. The average monthly decline in unemployment had been -20,000 between mid-2009 and the initial trough in December 2011, 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. 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 this eight-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 2.37 million in April 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 repeated the previous month’s 5.3%, a record low for post-unification times. This compares to a high of 12% in early 2005. The latest (extrapolated) Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain extremely benign. In February, the latest month for which such data is available, 12,000 employees were affected (not adjusted for seasonal variations), down from 13,000 in January 2018 and 42,000 in February 2017. This level represents only 0.8% of the peak of 1.44 million seen in May 2009. Furthermore, the Agency estimates new applications for (cyclical) short-time work at 8,000 in March, as in February and up only marginally from 7,000 in January. 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 -9.6% y/y in April, lower than in March (-8.8%) or a quarter earlier in January (-6.9%).  The degree of government support – and thus dampening effect on registered unemployment – is therefore being curtailed steadily. Indeed, 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 that this has been declined relatively more since January. In April, underemployment declined by 17,000 m/m as opposed to the smaller headline drop by 7,000. This contrasts with the pattern of less benign underemployment data during much of 2016 and early 2017, then reflecting an increase in government measures in order to cope with the large refugee inflow in 2015.

 

Meanwhile, seasonally adjusted employment (data for which lags unemployment by one month) increased 32,000 to a level of 44.709 million in March. This represents a slowdown when compared to the average pace of 40,000 observed since the start of the upward trend of the latest cycle in March 2010, but it is a weather related correction to January’s above-average increase by 92,000. The first-quarter average of 56,000 still exceeds the 2017 average of 49,000. In cumulative terms, the latest level of employment is now 3.67 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 0.93 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 increased only 1,000 in April, however, as already seen during January-March. The latest level of 786,000 still represents an all-time peak, but the number of vacancies now seem to be levelling off. The upward trend had begun at around 280,000 in mid-2009 (little more than a third of current levels), leading to an interim high at 501,000 in January 2012 before correcting temporarily to an interim trough of 449,000 in June 2013.

 

Overall, labour market conditions remain healthy in Germany, having been hurt only 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, 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 structurally robust demand conditions, partly related to the sharp increase in immigration but also due to government policies encouraging additional investment in infrastructure. Last autumn, Germany’s research institutes even warned against an overheating labour market in the construction sector.

 

Following GDP growth of only 0.6-0.7% in 2012-13, this accelerated to a range of 1.5-2.0% during 2014-16 and 2.5% in 2017. The latest IHS Markit forecast for 2018, published in mid-April, has been reduced from 2.8% to 2.6%, however, given some fairly pronounced downward corrections of key leading indicators and also some disappointing production, export, and retail sales data during the first quarter. That said, manufacturing PMI and Ifo business climate surveys had posted all-time highs around the turn of the year, and 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 continue to run well above capacity in 2018. Owing to the refugee factor – given rising numbers being officially granted asylum, completing qualification measures, and then looking for work – IHS Markit still expect the trend decline in headline unemployment to slow down during 2018, but not to reverse.  In annual average terms, the unemployment rate should slip from 5.7% in 2017 to 5.2% in 2018 and 5.0% in 2019. Meanwhile, employment will continue to show robust growth – for a country with Germany’s demographics – of roughly 1.3% y/y in 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. 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