IHS Markit: Fairly severe winter conditions slow down German unemployment decline in January – by Timo Klein

 Frankfurt/Main (31.1.19) – In January, seasonally adjusted German unemployment only declined by 2,000 month-on-month (m/m), nevertheless reaching another record low of 2.263 million. The slowdown from the average monthly decline by 15,000 observed during 2018 can partly be explained by relatively severe winter weather (hurting construction in particular). Furthermore, a separate statistic shows a much larger decline by 22,000 m/m of seasonally adjusted underemployment as opposed to unemployment – thus also including people who receive some government support despite having a job. This continues and extends a tendency already seen during most of 2018, reflecting the fact that the Labour Agency is scaling back the number of support measures that had been ramped up during 2016-17 in reaction to the refugee crisis. Abstracting from these factors, the downward trend in joblessness that began in 2005 is continuing unabated despite the economic slowdown since mid-2018. The same is true for employment, which has been increasing at an average pace of 40,000 per month since March 2010. This is four times the size of the average pace of unemployment declines in the same 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 since 2010.


The adjusted level of (registered) joblessness of 2.26 million in January 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. That being said, 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 November, 27,000 employees were affected (not adjusted for seasonal variations), following 21,000 in October 2018 and 16,000 in November 2017. This level nonetheless represents only 1.9% 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 December 2018, remained broadly steady at 14,000. 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 0.3% y/y in January, down from December’s 1.0%. The degree of government support – and thus dampening effect on registered unemployment – has thus diminished a little at the data edge.


Meanwhile, seasonally adjusted employment (data for which lags unemployment by one month) increased 42,000 to a level of 45.036 million in December, matching the average of roughly 40,000 observed both in 2018 and since the start of the current cyclical upward trend in March 2010. The latest level of employment is now 4.00 million higher than at the time of its previous cyclical peak of 41.04 million in February 2009. By contrast, unemployment only declined by 1.04 million during the last ten years, implying a major increase of the labour force by almost 3 million people.


Seasonally adjusted vacancies have rebounded by 3,000 in January, having temporarily declined by a cumulative 5,000 during the fourth quarter of 2018. At a level of 805,000, vacancies are thus continuing to hover near all-time highs. This 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 and also in January, 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%, German economic growth will still be running at a pace at the lower end of that range 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 therefore continues to expect an ongoing trend decline in headline unemployment in the coming months. 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 – in part due to the increasing skills shortage – from 1.3% y/y in 2018 to 0.8% in 2019.


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