January German labour market report beats expectations yet again as unemployment reaches fresh post-unification low

According to the national Labour Agency, seasonally adjusted German unemployment declined by 20,000 month on month (m/m) in January, a larger-than-expected drop to yet another record low since German re-unification in 1990. Following a temporary sideways tendency around mid-2015, the downward trend existing since mid-2009 has been 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 86,000 overall) and, following a fresh drop by 71,000 between December 2013 and April 2014, one in May/June 2014 (by 27,000). The latter had 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 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 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 increasing 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 (-9,000), 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 2.732 million in January, representing yet another all-time low in unified Germany. This compares with 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 has slipped from 6.3% to 6.2%, which is also the lowest level of the past 25 years. 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 on firms' cyclically induced usage of short-time work schemes are somewhat higher than before, but remain fairly benign as yet (the agency also notes an increased statistical uncertainty). In November, the latest month for which such data is available, 68,000 employees were affected (not adjusted for seasonal variations), which is 21,000 more than in October and 17,000 more than in November 2014. This level still represents only 4.7% of the peak of 1.44 million seen in May 2009. Meanwhile, new applications for (cyclical) short-time work are estimated by the agency at 22,000 in December, following 20,000 in November, 24,000 in October, and a trough at around 12,000 in July/August. Separately, the agency states that the number of people benefiting from so-called active labour market policy measures (including that involving the activity of private firms) posted -2.1% year on year (y/y) in January, following -3.7% y/y in December and -4.0% y/y a quarter earlier in October. This means that the degree of government support and thus relief effect for registered unemployment retains a diminishing tendency at the data edge, but with less momentum than before. Nevertheless, recent unemployment declines are still largely market-driven.

Meanwhile, unemployment not adjusted for seasonal variations increased 239,000 m/m to 2.920 million in January (rate: 6.7%, down from 7.0% a year ago). This is a smaller monthly increase than the average of 276,000 seen during January in 2013–15. The January level undershoots its year-ago value by 111,000 or -3.7% y/y, a steeper decline than the roughly -3% in the two preceding months. This is the 25th successive month showing a decline, which follows a 15-month period of annual increases ending in December 2013. Movements in and out of unemployment encouragingly show that 1% fewer people became unemployed in January than in January 2015, and 4% more people concurrently exited 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 compared from year ago.

Separate data show underemployment reverting to faster decline than headline unemployment lately, refugee influx has little impact as yet

Underemployment, which unlike unemployment also includes people benefiting from Labour Agency support measures or unable to work for reasons of (long-term) illness, declined by -25,000 in January and -17,000 in December. This is slightly more pronounced than the declines of -20,000 and -16,000 observed for headline unemployment in the two latest months. This reinstates, after a brief interruption in October/November, the 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 November that implies a labor force increase of 673,000 (or 2.2% 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 60% y/y in January, but this represents only an increase of 38,000 (to 101,000) in absolute numbers. This factor will only impact headline unemployment more visibly from mid-2016 onwards.

Growth in employment and vacancies remains very 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 44,000 m/m in seasonally adjusted terms to a level of 43.25 million in December. This latest increase matches the performance in November (up 46,000) and exceeds the average of 35,000 seen during the first 10 months of 2015. It compares even more favourably to the average of 28,000 during the three-year period 2012–14. Indeed, the most recent pace of employment build-up is broadly at par with developments in 2010–11, when German GDP grew at a clip of almost 4% and not less than 2% as at present. In cumulative terms, the latest level of employment is now 2.21 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 0.55 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 November, increased 76,000 (seasonally adjusted), following 56,000 in October. This is not only attributable to the economic cycle but also benefits from sectoral change and high immigration numbers. 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 757,000 y/y (up 2.5%) in November, following 703,000 y/y (up 2.3%) in October.

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, i.e. those supported by Labour Agency funds and not the private sector, are no longer being counted. The same applies to purely seasonal jobs (e.g. 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 January 2016, seasonally adjusted vacancies continued to increase at a solid pace. Extending the upward trend observed since mid-2013, January vacancies increased 13,000 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 633,000. 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 85 days on a 12-month rolling basis, eight days more than in January 2015. Firms are continuing to have great difficulties in rapidly finding the qualified personnel they need. The seasonally adjusted vacancy index called BA-X – which disregards all seasonal and publicly subsidised job offers – has increased by four points to yet another all-time high of 211 in January, up 30 points y/y.

Outlook and implications

Overall, labour market conditions remain healthier in Germany than in most other countries in Europe. The boosting effect that the Eurozone debt crisis had on German unemployment during 2012–13 was a very mild one that was 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 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) 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, however, 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 many 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 around 1.6% in 2014 and 2015, and the IHS forecast set in January looks for 2.0% in 2016 in calendar-adjusted terms (even 2.1% 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 and especially its service-sector counterpart during the latter half of 2015, and similar developments for purchasing manager data. This is qualified only in part by a downward correction at the data edge around the turn of the year. On balance, German economic growth in 2016 continues to be expected to exceed the country'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 6.7% in 2014 and 6.4% in 2015 to 6.2% in 2016 before rebounding modestly to around 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 since mid-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.