IHS: Improvement in German labour market conditions accelerates in December
Frankfurt/Main (3.1.18) – In December, seasonally adjusted German unemployment declined by 29,000 month-on-month (m/m) to 2.442 million, yet another record low in post-unification times (since 1990) and representing acceleration at the data edge. The monthly decline was twice as large as the average drop of 14,000 during January-November 2017, let alone the average decline by 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 19,000). 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 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. 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 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 2.442 million in December 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 remained at 5.5%, a record low for post-unification times (November’s rate was revised down from 5.6% originally). 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 already began at 12% in 2005. The latest (extrapolated) Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes remain benign. In October, the latest month for which such data is available, 24,000 employees were affected (not adjusted for seasonal variations), up from 15,000 in the previous month but down from 39,000 in October 2016. This level represents only 1.7% of the peak of 1.44 million seen in May 2009. Furthermore, the Agency estimates new applications for (cyclical) short-time work at just 6,000 in November, following 7,000 in October and also 6,000 in September. 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 -5.5% y/y in December, up from -6.9% y/y in November but down from -4.2% y/y a quarter earlier in September. The degree of government support – and thus dampening effect on registered unemployment – is still diminishing (thus unwinding the temporary pickup in 2016), but the pace seems to be slowing down. A separate statistic showing underemployment as opposed to unemployment reveals that the former declined by 23,000 m/m in December (seasonally adjusted), thus to a lesser extent than headline unemployment. This matches the pattern seen during much of 2016 and early 2017, reflecting ramifications of the large refugee inflow in 2015, whereas the reverse had been the case around mid-2017.
Meanwhile, seasonally adjusted employment (data for which lags unemployment by one month) increased 50,000 in November, leading to a level of 44.48 million. This latest increase exceeds the average pace of 40,000 observed since the start of the upward trend of the latest cycle in March 2010. Employment growth remains very dynamic. In cumulative terms, the latest level of employment is now 3.44 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 0.83 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 18,000 to 790,000 in November, an all-time peak and a much larger increase at the data edge than the average monthly pace of 6,000 observed since mid-2013. 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, not least due to rising migration from troubled Eurozone countries and Eastern Europe. The surge in the refugee influx (mostly from the war-torn Middle East) during 2015-16 will strengthen this tendency in subsequent years as more and more asylum seekers obtain right of residence. 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. 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 this factor is far too weak to lead to a net rebound in unemployment. 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. Germany’s research institutes recently 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 roughly 3% in 2017. The latest IHS Markit forecasts published in mid-December foresee growth of 2.6% in both 2017 and 2018, but the prediction for 2018 will be raised further in the upcoming January round. This bright outlook has been supported by very elevated leading indicators recently. The Ifo business climate index overcame a brief interim correction in August-September to post successive record highs in October and November before correcting slightly in December, and manufacturing PMI reached a survey high (since 1996) in December. 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 an actual rebound of the unemployment rate should not be expected in the next 1-2 years. In annual average terms, the unemployment rate is likely to slip from 6.1% in 2016 to 5.7% in 2017 and 5.4% in 2018. Meanwhile, employment will continue to show solid growth – for a country with Germany’s demographics – of more than 1% throughout 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.