IHS: German labour market conditions continue to improve at a healthy clip in February

 

Frankfurt/Main (28.2.18) – In February, seasonally adjusted German unemployment declined by 22,000 month-on-month (m/m) to 2.393 million, yet another record low in post-unification times (since 1990). Monthly declines have even shown an accelerating tendency in recent months as the average drop by 24,000 during November-February compares to only -14,000 during January-October 2017 and -10,000 during 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 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 14,000 per month. Meanwhile, employment has been increasing almost without interruption since March 2010, posting an average monthly increase of 41,000. This is four times the size of the average pace of unemployment declines in this near-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 2.393 million in February 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 5.4%, a record low for post-unification times. The unemployment rate had been fluctuating in a narrow band of 6.7-7.0% between June 2011 and September 2014 before resuming the long-term downward trend that began at 12% back in 2005. The latest (extrapolated) Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain extremely benign. In December 2017, the latest month for which such data is available, 15,000 employees were affected (not adjusted for seasonal variations), as in the previous month and down from 30,000 in December 2016. This level represents only 1.0% of the peak of 1.44 million seen in May 2009. Furthermore, the Agency estimates new applications for (cyclical) short-time work at 6,000 in January, down from 17,000 in December and 7,000 in November (the interim increase in December had been due to a single firm, likely a car manufacturer). 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 -8.2% y/y in February, lower than in January (-6.4%) or a quarter earlier in November (-7.1%).  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 declined relatively more during the last two months (by 32,000 in February versus the decline by 22,000 in headline terms). This contrasts with the pattern of less benign underemployment data during much of 2016 and early 2017, then reflecting ramifications of the large refugee inflow in 2015.

 

Meanwhile, seasonally adjusted employment (data for which lags unemployment by one month) increased 60,000 to a level of 44.643 million in January. The latest increase continues to exceed the average pace of 41,000 observed since the start of the upward trend of the latest cycle in March 2010, underlining the current momentum of job creation. In cumulative terms, the latest level of employment is now 3.61 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 0.89 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 2,000 in February, having even stagnated in January. Nevertheless, the latest level of 785,000 represents an all-time peak. The average monthly increase in vacancies has been 8,000 since the start of 2017, up from an average pace of 5,500 between the start of the latest rebound in mid-2013 and end-2016. 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 very 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 (latter only affecting the statistics once an asylum seeker has obtained a right of residence, which may take up to two years given constraints in administrative capacity). In fact, the 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 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 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-February, has confirmed January’s prediction of 2.8%. This bright outlook can be maintained despite some downward corrections of ley leading indicators most recently, given that the manufacturing PMI and Ifo business climate surveys had posted all-time highs in December and January, respectively.  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 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 eventually 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 1.4% 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