Morgan Stanley: "Germany: A Nasty Surprise"

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Germany: A Nasty Surprise, Really

Elga Bartsch (Morgan Stanley, London)

This morning's German labour market report really contained a nasty surprise for the forecasting community. Against market expectations of a slight rise, May unemployment registered the largest monthly rise seen in the present labour-market downturn. Much higher than expected, but in line with earlier leaks, seasonally-adjusted unemployment rose by 60,000 in May to a total of 4.043 million. In addition, the April level was revised up by 10K. In May, the number of job seekers rose a hefty 41K in the western part of the country and a more noticeable 19K in eastern Germany. While a further deterioration in labour market conditions is corroborated by other indicators, such as the employment components of several business surveys, the numbers are also likely to have been affected by special factors. So, what exactly happened and do we have to brace ourselves from more of the same?

Even though the marked rise in unemployment is also echoed by other indicators, the report is likely to have been affected by a number of special factors. According to the Labour Office these include: First, the Job-AQTIV bill implemented this spring, which introduced tighter conditions for those who want to collect unemployment benefits. Over the last few months, the Job-AQTIV bill seems to have caused Germans not to register as unemployed to the same extent as before. Now, however, they seem to be back in the dole queues. The latter could well reflect a worsening in the prospects to find a job, which has also been witnessed in the last consumer survey.

The second reason cited by the Labour Office is the recent bout of industrial action, which likely hampered hiring in the construction industry. This view is supported by the rise in unemployed male industrial workers, in particular from the metal and construction sector. Third, an unusual cluster of public holidays could have affected the numbers by companies holding back on hiring until June. Last but not least, government-sponsored employment programmes haven't been stepped up to the same extent, as they usually would have been in May. The number of people enrolled in these programmes only stood 15K above last year's reading, compared to an increase twice that size recorded in April.

The startling rise in the number of jobless Germans can thus probably be explained partly by a number of special factors. But there is also no mistaking the worsening in labour market conditions. Looking at the in- and outflows from the pool of job-seekers shows that the sharp rise in unemployment is due to an unusually high number of people loosing their jobs and -- and this is the real worry -- due to deteriorating prospects of finding a new job. This not only shows in the small outflow from the pool of unemployed, but also in a 6K decline in the number of vacancies, the second monthly drop after a 1K dip in April.

This worsening of employment prospects, which has also been evident in the May consumer survey, reflects the still sluggish economic recovery coupled with hefty wage settlements reached in several sectors over the last few months. According to the Labour Office, it might well take until Q4 before we see jobs picking up and unemployment falling. Our composite employment index, which summarises employment trends in manufacturing, services and construction, has again dipped to a new low for the series (which starts in June 97). The index fell to a suppressed level consistent with accelerating payroll decline. Payrolls declined 13K in March, the latest available data, thus showing a slight slowdown in the pace of job losses. We expect payrolls to contract well into the summer -- if not the autumn -- as growth remains below the level consistent with expanding payrolls.