German labour market gives little indication of tiring at the end of 2018, according to December report 

Frankfurt/Main (4.1.19) – In December, seasonally adjusted German unemployment declined by 14,000 month-on-month (m/m) to yet another record low of 2.261 million, still giving no indication of an imminent end to the downward trend that began in 2005 despite the GDP contraction in Q3 2018. The average monthly drop during 2018 has been 15,000, broadly matching the pace of 16,000 in 2017 and clearly exceeding the much more muted pace of 4,000 per month during 2012-16. Meanwhile, employment has been increasing almost without interruption since March 2010, posting an average monthly increase of 40,000. This is almost four times the size of the average pace of unemployment declines in the same period (-11,000), 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 since 2010.

 

The adjusted level of (registered) joblessness of 2.26 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 has remained put at its post-unification record low of 5.0%, which compares to a peak of 12.0% back in 2005. The latest (extrapolated) Labour Agency figures about firms‘ cyclically induced usage of short-time work schemes show an increase from very subdued levels. At the data edge in October, 32,000 employees were affected (not adjusted for seasonal variations), following 21,000 in September 2018 and 16,000 in October 2017. This level nonetheless represents only 2.2% of the May 2009 peak of 1.44 million, and the Agency’s estimate for new applications for (cyclical) short-time work one month on, in November 2018, remained broadly steady at 13,000. 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) increased 1.7% y/y in December, up from November’s 0.4% and contrasting with declines in the preceding period. The degree of government support – and thus dampening effect on registered unemployment – has thus picked up a little of late.

 

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 a decline by 11,000 in December, slightly smaller than the drop in headline joblessness. This contrasts with most of 2018, when underemployment fell faster than unemployment as the Labour Agency scaled back its support measures as the refugee related increase of 2016-17 was unwound. This unwinding development has now come to an end as the level of government support has started to rise anew.

 

Meanwhile, seasonally adjusted employment (data for which lags unemployment by one month) increased 34,000 to a level of 44.967 million in November, remaining close to the average of roughly 40,000 observed both in recent months and since the start of the current cyclical upward trend that began in March 2010. The latest level of employment is now 3.93 million higher than at the time of its previous cyclical peak of 41.04 million in February 2009 and even 4.18 million higher than the February 2010 low caused by the global financial crisis of 2008. By contrast, unemployment only declined by 1.03 million during the last ten years, implying a major increase of the labour force by almost 3 million people.

 

Seasonally adjusted vacancies have declined for the third consecutive month in December, however, albeit again only marginally by 1,000 to 801,000. The last time that vacancies retreated was in May 2014. In September, vacancies had reached an all-time high of 807,000, which compares with a cyclical low of 282,000 in July 2009.

 

The German labour market remains robust, defying the economic slowdown highlighted by the GDP contraction in the third quarter of 2018 and the various negative external factors at play presently (Brexit uncertainty, protectionist US trade policy, Italy’s clash with EU over fiscal policy). The 14-year downward trend for unemployment, interrupted only briefly in 2009 due to the Lehman crisis, is providing ongoing support for German consumer demand. 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 the refugee factor are still being overcompensated by the inherent downward tendency in overall joblessness.  Meanwhile, the construction sector enjoys very strong structural demand, partly related to the sharp increase in immigration but also due to government policies encouraging additional investment in infrastructure.

 

Heralded by downward corrections of key leading indicators (Ifo, PMI, ZEW) during 2018, economic growth has lost momentum. However, the third-quarter contraction in GDP was critically caused by one-off factors (reduced car output due to the introduction of a new emissions test procedure; a drought causing transport problems due to low river levels), which will lead to an unwinding reaction in the two subsequent quarters. Underlying GDP growth momentum is also supported by construction and public consumption, which benefit from structural factors and budget surpluses, respectively. Furthermore, private consumption will be helped in early 2019 by the purchasing power boost linked to the sharp recent drop in oil prices. Overall, with Germany’s rate of potential growth being in a range of roughly 1.25-1.50%, the German economy will continue to run close to capacity in 2019.

 

Notwithstanding the ongoing inflow of refugees entering the labour market – following the granting of asylum and the completion of qualification measures – IHS Markit still expect the trend decline in headline unemployment to continue at least during the first half of 2019. In annual average terms, the unemployment rate based on registered joblessness should slip from 5.7% in 2017 and 5.2% in 2018 to 4.9% in 2019. In ILO (harmonized) terms, this corresponds to a decline from 3.8% in 2017 and 3.4% in 2018 to 3.2% in 2019. Meanwhile, employment will continue to rise, albeit slowing from 1.3% y/y in 2018 to 0.8% in 2019 as the increasing skills shortage takes its toll.

 

Finally, the general shift towards increased immigration since 2011, with considerably increased momentum observed during 2015-16, 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