German labour market report for December 2015 beats expectations, with migrant crisis yet to play significant role

According to the national labour agency, seasonally adjusted German unemployment declined by 13,000 month on month (m/m) in December to yet another record low since German re-unification in 1990. Following a temporary sideways tendency around mid-2015, the downward trend that started in mid-2009 has resumed in recent months. Indeed, during those six and a half years, there have been two prior upward corrections that equally failed to turn the trend, one between April 2012 and November 2013 (by 88,000 overall) and, following a fresh drop of 74,000 between December 2013 and April 2014, one in May/June 2014 (by 27,000). The latter reflected temporarily stagnating GDP growth in combination with weather and holiday timing effects. Importantly, even during the more pronounced increase in unemployment during 2012–13 there had been a large concurrent expansion in the labour force, rendering the very limited reaction of unemployment to the slowdown in GDP growth quite remarkable and also helping to explain why employment continued to rise steadily in this time. With respect to unemployment, the average monthly decline between mid-2009 and the initial trough in March 2012 had been -19,000, more than double the average pace of -7,000 observed during 2015. By contrast, employment has been rising almost without interruption since late 2009, posting an average monthly increase of 33,000 during the past six years. This is almost four times the size of the average pace of unemployment declines in this period, which demonstrates the robustness of the upward trend in the size of the labour force and therefore the extent of the underlying improvement in the labour market in recent years.

The adjusted level of joblessness was 2.757 million in December, representing yet another post-unification all-time low. This compares to a preceding cyclical trough of 3.18 million in November 2008 (end of the economic boom of 2006–08) and the post-Lehman crisis peak of 3.49 million in mid-2009. The adjusted unemployment rate in December repeated November's 6.3%, also a post-unification record low. The unemployment rate had been fluctuating in a narrow band of 6.7–6.9% for three years from September 2011, but has been declining again since October 2014. The latest labour agency figures on firms' cyclically induced usage of short-time work schemes remain quite benign, although the level has risen. In October, the latest month for which such data are available, 54,000 employees were affected (not adjusted for seasonal variations), which is 17,000 more than in September and 6,000 more than in October 2014. This level still represents only 3.8% of the peak of 1.44 million in May 2009. Meanwhile, new applications for (cyclical) short-time work are estimated by the agency at 20,000 in November, following 24,000 in both September and October and extremely low levels of around 12,000 in July/August. Furthermore, the agency states that the number of people benefiting from so-called active labour market policy measures (including those involving the activity of private firms) posted -2.9% year on year (y/y) in December, following even -4.4% y/y in November and -2.5% y/y a quarter earlier in September. This means that the degree of government support and thus relief effect for registered unemployment retains a diminishing tendency at the data edge, which underlines the market-driven nature of recent unemployment declines.

Meanwhile, unemployment not adjusted for seasonal variations increased by 48,000 m/m to 2.681 million in December (rate: 6.1%, down from 6.4% a year ago). This is a smaller monthly rise than the average of 68,000 during December in 2012–14. The December level undershoots its year-ago value by 82,000 or -3.0% y/y, almost unchanged from the annual change of the two previous months. This is the 24th successive month showing a decline, which follows a 15-month period of annual increases ending in December 2013. Movements in and out of unemployment show that in December 6% fewer people became unemployed than in December 2014, and also 6% fewer people concurrently exiting unemployment than a year ago. The agency reiterates that the risk of becoming unemployed has diminished even further during the last 12 months despite already being at a very low level. The chances for an individual of terminating a phase of unemployment by getting a regular job have improved from a year ago.

Separate data show underemployment not falling as much as headline unemployment lately; refugee influx has little impact as yet

Underemployment, which unlike unemployment includes people benefiting from labour agency support measures or who are unable to work for reasons of (long-term) illness, declined by only 4,000 in December, less than the 13,000 drop in headline unemployment. Since October 2015, there has been a reversal of a long-standing tendency of positive underlying labour market developments – as better reflected by underemployment data – being underestimated by headline numbers.

Separately, other things equal, an increasing supply of labour (markedly so since 2012) is continuing to boost measured joblessness. This is due to a rising participation rate (including new employment by people from the so-called hidden reserve) and increasing immigration, in part due to the Eurozone debt crisis. The labour agency cites latest data for employment paying social security contributions in October that imply a labour force increase of 630,000 (or 2.0% y/y) within only 12 months.

The agency also notes that unemployment among non-European asylum seekers (the bulk of the refugees in recent months) has increased by 54% y/y, but this represents only an increase of 32,000 (to 90,000) in absolute numbers. This factor will likely only impact headline unemployment more visibly from mid-2016 onwards.

Growth in employment and vacancies remains robust at the data edge

Employment, data for which lags unemployment by one month, continues to build at a remarkable pace. Following a phase with somewhat subdued momentum between mid-2014 and mid-2015, employment increased by 42,000 m/m in seasonally adjusted terms to a level of 43.20 million in November. This latest gain exceeds the average of 34,000 during the first 10 months of 2015 and compares even more favourably to the average of 28,000 during the three-year period 2012–14. Indeed, the most recent pace of employment growth is broadly on a par with developments in 2010–11, when German GDP grew at a clip of almost 4%. The employment total is now 2.16 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 0.53 million in this period. Note that during the recession in the first half of 2009, employment had already been falling by less than unemployment was increasing, as firms aimed to hold onto their existing workforce wherever possible at the time (utilising short-time work schemes instead). In that phase, the labour force had thus been increasing but firms refrained from hiring. 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.

Meanwhile, regular employment paying social security contributions, data for which are only available until October, increased 60,000 (seasonally adjusted), following 57,000 in September. The introduction of a general minimum wage has apparently not materially dampened growth in employment paying social security contributions. Such regular employment has generally been developing more positively than overall employment since 2013 already. The annual comparison of regular employment in non-adjusted terms, which has been positive since March 2010, posted an increase of 713,000 y/y (up 2.3%) in October, following 681,000 y/y (up 2.2%) in September.

With regard to vacancies, it should be recalled that the statistical methodology was changed in July 2010. This reduced reported levels because jobs offered in the secondary market (those supported by labour agency funds and not the private sector) are no longer counted. The same applies to purely seasonal jobs, such as for harvests in the agricultural sector. In July 2014, a fresh change was implemented that conversely boosted the absolute level of historic data by up to 34,000. In December 2015, seasonally adjusted vacancies continued to build at a solid pace. Extending the upward trend observed since mid-2013, December vacancies increased 10,000 m/m. This compares to an average monthly increase of only 4,000 between mid-2013 and end-2014 and 8,000 during 2015. Vacancies have now reached a new cyclical and also all-time peak of 620,000. 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 448,000 in June 2013.

The average time it currently takes to fill a vacancy has increased to 84 days on a 12-month rolling basis, seven days more than in December 2014. Firms are continuing to experience great difficulties in rapidly finding the qualified personnel they need. The seasonally adjusted BA-X vacancy index – which disregards all seasonal and publicly subsidised job offers – has increased an additional point to yet another all-time high of 206 in December, up 26 points y/y.

Outlook and implications

Overall, labour market conditions remain healthier in Germany than in most other countries in Europe. The Eurozone debt crisis's boosting effect on German unemployment during 2012–13 was very mild and already fully unwound by late 2014. Even the additional interim setback around mid-2014 due to temporary GDP stagnation had left only a small dent in the persisting underlying downward tendency for joblessness, and German consumer demand has consequently not been harmed. At the same time, employment developments have 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) in recent months will strengthen this tendency during 2016 as more and more asylum seekers obtain right of residence, although by the same token unemployment will also increase modestly due to a combination of the sheer numbers of refugees and the need to raise their qualification levels first (which – on average – will take years). Given the administrative lags involved as authorities are currently being overwhelmed by the numbers, German labour market statistics will only reflect this factor in a significant manner from roughly mid-2016 onwards. Meanwhile, the construction sector enjoys structurally robust demand conditions, partly related to sharply rising immigration but also due to government policies encouraging additional investment in infrastructure. Overall, underlying German economic growth will remain robust during 2016 despite lingering Eurozone stability concerns, various geopolitical crises with associated risks of enhanced terrorist activity, and economic problems in major emerging market countries. Sharply lower oil price levels than until mid-2014, a much softer euro, and the ECB's policy of quantitative easing are all providing support for economic activity at present.

Following only 0.4% in 2013, GDP growth has already accelerated to 1.6% in 2014 and IHS December forecasts look for 1.5% in 2015 and 2.0% in 2016 in calendar-adjusted terms (even 1.8% and 2.1%, respectively, in unadjusted terms, the format used by the German government in its projections). This expectation of ongoing robust growth momentum is being underpinned by the recovery of the Ifo business climate indicator during the latter half of 2015, after a short-lived relapse in May/June, and all-time highs of the service-sector counterpart of the Ifo survey in November/December 2015. Growth in 2016 is thus expected to exceed Germany's current rate of potential growth of just below 1.5%. Taking the ramifications of refugee developments into account, IHS now expects unemployment in annual average terms to decline from 6.4% in 2015 to 6.3% in 2016 before rising modestly to 6.5% in 2017–18. It should be kept in mind that such slight deterioration of the unemployment statistic will go hand-in-hand with significant further growth in employment and thus income.

Finally, the general shift towards increased immigration since 2011, with considerably increased momentum observed during 2015, is substantially changing demographic dynamics and thus the long-term outlook at present. Thus the working-age population and also labour supply will not decline any time soon, instead increasing further at least for several years.