Hanging loose? German unemployment dropped by a non-seasonally adjusted 83,400 in May, bringing the total number of unemployed to 2.937 million, the lowest level since December 2012. In seasonally-adjusted terms, unemployment actually increased by 21,000, still keeping the seasonally-adjusted unemployment rate unchanged for the eighth consecutive month at 6.9%.
Despite the stable unemployment rate, it remains noteworthy that the non-seasonally adjusted drop was the weakest May performance since 2005. To some, this is a clear warning that the debt crisis is finally taking its toll on the German labour market. In our view, however, the weak spring revival of the labour market can also be explained by the relatively high number of public holidays in May and the still cold weather. Therefore, it is far too premature to start singing Swan Songs on the labour market.
In fact, the German labour market remains the show case example for successful labour market reforms. Even the current success has also received a helping hand from strong export growth and the first wave of ageing, the reforms of the mid-2000s are still paying off. Up to the early 2000s, the German economy required growth of at least 1 ½ % to create new jobs. In recent years, GDP growth rates of less than 1% were sufficient for job creation. This bodes well for the near-term outlook, indicating that despite an expected GDP growth rate of only roughly 0.5% this year, the labour market should remain stable. At the Eurozone level, it is obvious that the success of its own structural reforms will further encourage the German government to continue hammering on structural reforms.
In our view, the acceleration of private consumption in the first quarter was more than a simple one-off. Latest wage settlements indicate that nominal wages in the entire economy should increase by around 3% this year. With an expected inflation rate of below 2%, real wages look set to increase for the second year in a row. Domestic demand should continue to be an important growth driver this year.