Thursday, May 31, 2012

German labour market loses more momentum

German unemployment dropped by a non-seasonally adjusted 108,000 in May, bringing the number of unemployment to the lowest level since December last year. However, this is the weakest May improvement since 2002. In seasonally-adjusted terms, unemployment remained unchanged, bringing the seasonally-adjusted unemployment rate down to 6.7%, from 6.8%. Earlier today, German retail sales, adjusted for seasonal effects and inflation, were up by 0.6% MoM in April. The second consecutive increase.

At first glance, today’s numbers illustrate the strength of domestic demand, at least partly cushioning the German economy against the negative impact from the debt crisis. At second glance, however, signs are increasing that the resilience of the German labour market is slowly cracking up. The non-seasonally adjusted improvement in May was already much weaker than one year ago and actually the weakest May-improvement since 2002. Moreover, recruitment plans have been further downscaled. In May, the European Commission’s index for employment expectations in the German manufacturing industry turned negative for the first time since July 2010. Interestingly, the official vacancy index, BA-X, increased in May, stabilising at a level close to historical highs. The combination of weakening recruitment plans and high vacancies shows that the German labour market has probably reached a level close to its natural unemployment rate. Further significant drops of unemployment would require new structural reforms.

The German labour market is losing momentum but this is not yet a cause for concern. At least not for this year. With a new boost from latest wage settlements, domestic demand might not be a strong, but definitely an important, growth driver.

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