German unemployment holds broadly steady in September amid slowing employment growth

According to the National Labour Agency, seasonally adjusted German unemployment has remained virtually steady in September, increasing marginally by 1,000 month on month (m/m) to 2.680 million. This represents stabilisation at the lowest level since German reunification in 1990. Unemployment has been enjoying a downward trend since mid-2009, interrupted only twice by modest upward corrections between April 2012 and November 2013 (by 86,000 in net terms) and in May/June 2014 (by 25,000). The latter was more technical than cyclical in nature, given weather and holiday timing effects. 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 also helping to explain why employment continued to increase steadily during this time. The average monthly decline in unemployment between mid-2009 and the initial trough in March 2012 had been 19,000, followed by near-stagnation (only -2,000 per month) in the three-and-a-half subsequent years until September 2015, and now a decline of 9,000 per month over the past 12 months. By contrast, employment has been increasing almost without interruption since March 2010, posting an average monthly increase of 36,000. This is four times the size of the average pace of unemployment declines in this period (9,000), 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 2.68 million in September compares with a preceding cyclical trough of 3.18 million in November 2008 (following the end to the economic boom of 2006–08) and the post-Lehman-crisis peak of 3.49 million in mid-2009. The adjusted unemployment rate has now been at 6.1% for the past five months, the lowest level in the history of pan-German data (since 1992). The unemployment rate had been fluctuating in a narrow band of 6.7–6.9% for three years starting in September 2011, but has been declining again since October 2014. The latest (extrapolated) labour agency figures about firms' cyclically induced usage of short-time work schemes remain benign. In July, the latest month for which such data are available, 31,000 employees were affected (not adjusted for seasonal variations), down from 40,000 in June 2016 and 35,000 in July 2015. This level represents only 2.2% of the peak of 1.44 million seen in May 2009. Furthermore, new applications for (cyclical) short-time work are estimated by the agency at still only 20,000 in August, up moderately from 11,000 in July and 13,000 in June. The July level had been the lowest for many years (equal to that of August 2015). Separately, however, the agency also states that the number of people benefiting from so-called active labour market policy measures (including those involving the activity of private firms) has risen by 10.0% year on year (y/y) in September. Although this is a weaker increase than in August (13.8% y/y), it is up from a rise of 8.0% y/y a quarter ago in June and even smaller increases in the early months of 2016. This means that the degree of government support and thus dampening effect on registered unemployment has picked up in recent months, reversing the diminishing tendency that had been observed until end-2015.

Meanwhile, headline unemployment not adjusted for seasonal variations has declined by 77,000 month on month (m/m) to 2.608 million in September (rate: 5.9%, down from 6.2% a year ago), slightly below the average September decline of 93,000 m/m during 2013–15. The September level undershoots its year-ago value by 100,000 or 3.7%, a slightly smaller decline than in recent months. Nevertheless, this is the 16th successive month showing a decline. The agency reiterates that the risk of becoming unemployed has diminished further during the past 12 months, but the odds of an individual terminating a phase of unemployment by finding a regular job have diminished slightly compared with a year ago.

Rising underemployment reflects relief effect from additional government support measures, impact of refugee influx grows

Underemployment, which – unlike unemployment – also includes those benefiting from labour agency support or training measures or who are unable to work for reasons of (long-term) illness, has been rising since March. In September, underemployment has increased by 10,000 m/m (seasonally adjusted), which broadly matches the average increase of the past six months. Much of this reflects the greatly increased refugee inflow since mid-2015, contrasting with better headline unemployment data. To a certain extent, the picture painted by the headline jobless numbers thus glosses over underlying developments now.

At the same time, an increasing supply of labour (markedly so since 2012) is having an ongoing boosting effect on measured joblessness. This is due to a rising participation rate (including new employment of those from the so-called hidden reserve) and increasing immigration due to the Eurozone debt and refugee crises. The labour agency cites latest data for employment paying social security contributions in July that imply a labour force increase of 490,000 (or about 1.5% y/y) within 12 months.

The agency also notes that unemployment among non-European asylum seekers (the bulk of the refugees who have come to Germany since mid-2015) has increased by 109% y/y in September. Although this still only represents an increase of 90,000 (to 172,000) in absolute numbers, the growing impact on unemployment is gradually becoming more visible now.

Employment growth slows, vacancies continue to expand

Employment – data for which lag behind the unemployment figures by one month – increased by only 15,000 in August, thus leading to a level of 43.62 million. Following a previous phase with somewhat subdued momentum between May 2014 and January 2015 (when there had been an average monthly increase of 20,000), employment (seasonally adjusted) had been growing at an average monthly pace of 44,000 in the one-and-a-half years that followed, broadly matching the pace of 2010–11 when German GDP growth had been almost 4% and not near 2% as at present. The labour agency indicates that it expects the August data to be an outlier to the downside, given persistently dynamic vacancy data and a rising employment barometer. In cumulative terms, the latest level of employment is now 2.58 million higher than its previous cyclical peak of 41.04 million in February 2009, before the global crisis of 2007–08 had exerted its (lagged) effect. By contrast, unemployment declined by only 0.62 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. This is partly due to sectoral change and high immigration, while the introduction of a general minimum wage in early 2015 has not materially dampened growth in employment paying social security contributions. Such employment increased by 496,000 y/y (or 1.6%) in July, following even 592,000 in June, which compares with July growth of only 1.2% for overall employment.

Meanwhile, seasonally adjusted vacancies have picked up by 6,000 in September, which is still close to the 2015 average increase of 8,000 per month. The upward trend observed since mid-2013 remains intact. Vacancies have now reached a new cyclical and also all-time peak of 670,000. The upward trend in the previous cycle had begun at around 280,000 in mid-2009, leading to an interim high of 501,000 in January 2012, whereas the latest improvement had already started from a much higher low point of 449,000 in June 2013.

The average time it currently takes to fill a vacancy has increased to 90 days on a 12-month rolling basis, eight days more than in September 2015. Firms are continuing to encounter 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 by two points to yet another all-time high of 221, representing an annual increase of 24 points.

Outlook and implications

Overall, labour market conditions remain healthy in Germany. The boosting effect that the Eurozone debt crisis had on German unemployment during 2012–13 was a very mild one that had already been fully unwound by late 2014. Since mid-2009, there has been a persistent 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 massive increase in the refugee influx (mostly from the war-torn Middle East) since mid-2015 will strengthen this tendency during 2016–17 as more and more asylum seekers obtain right of residence, although by the same token unemployment will also increase modestly as more and more refugees attempt to enter the labour market following the completion of qualification measures (language skills; specific work skills). The administrative lags involved in processing asylum applications have meant that German labour market statistics are only now starting to reflect the surge in refugees that started around mid-2015. 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. The economy enjoys ongoing support from sharply lower oil price levels than until mid-2014, a soft euro, and the European Central Bank's (recently expanded) policy of quantitative easing.

Following GDP growth of only 0.6–0.7% in 2012–13, acceleration to a range of 1.5–2.0% has been observed since 2014. Notwithstanding modest dampening effects expected from Brexit, the latest IHS forecast published in mid-September foresees growth of 1.8% in 2016 and 1.7% in 2017. The very latest encouraging signals from leading indicators, especially the September Ifo business climate survey, suggest that growth in 2017 will actually be stronger at close to 2% as the manufacturing sector (and associated exports) rebounds and as service-sector activity remains robust. Indeed, consumer confidence as measured by the GfK survey has been hovering near 15-year highs during the third quarter. Furthermore, construction output and public consumption, the latter also reflecting refugees' subsistence needs, will remain supportive elements that are not affected by any negative 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 run slightly above capacity in the foreseeable future. Owing to the refugee factor – given rising numbers being officially granted asylum, completing qualification measures, and then looking for work – IHS nonetheless expects headline unemployment to start rising gradually during the coming months. From 6.1% at present, the unemployment rate should increase to around 6.3% during 2018–19. This anticipated mild deterioration of the unemployment statistic should go hand in hand with further growth in employment and thus income.

Finally, the general shift towards increased immigration since 2011, with considerably increased momentum during the second half of 2015 and early 2016, has substantially changed demographic dynamics and thus the long-term outlook. The working-age population and also labour supply will not decline any time soon, instead increasing further at least for several years.