Germany's Workers Are About to Feel the Impact of the Trade Storm

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The global trade storm battering manufacturing in Europe’s largest economy is about to reach the labor market.

German joblessness, which declined from one record low to the next for much of the past decade, is no longer falling and risks a reversal as workers endure the repercussions of the country’s factory slump. Production data for June on Wednesday showed the worst annual drop since 2009, and industry surveys show a feeble outlook for employment.

The European Central Bank is counting on private spending and investment to sustain growth and lift prices in Germany and the rest of the euro area as exports suffer from the deteriorating trade environment. Policy makers are concerned enough to be preparing fresh stimulus for as soon as next month.

While headline jobs numbers from Germany aren’t yet alarming -- the number of people out of work rose by only 1,000 in July -- below the surface, labor demand is softening, employers are switching to more short-time arrangements, and vulnerable parts of society are starting to feel the pain.

“The phase of continuous improvement in the labor market is behind us,” said Stefan Kipar, an economist at BayernLB in Munich. “What’s very clear is that companies are no longer adding jobs.”

Some, in fact, are planning to shrink their workforce, with Continental AG -- a bellwether of the country’s export-reliant car industry -- joining companies including BASF SE and Siemens AG in announcing reductions.

Adecco Group AG, the world’s largest employment agency, said on Thursday that its revenues were weighed down by slower growth in Europe, including Germany.

“It is clear that we see a continued weakness in manufacturing and automotive sectors,” Alain Dehaze, its chief executive officer, told Bloomberg Television. “The deceleration in Europe is there.”

Germany’s labor agency, based in Nuremberg, sees economic downturns typically affecting early labor-market indicators in five steps. Registered vacancies are usually the first to decline when demand softens, followed by diminished use of temporary employment. Both of those indicators have been weakening this year.

Receding contract work particularly hurts more vulnerable job seekers, as it’s often an entry into the labor market for people lacking qualifications. Roughly one in three unemployed refugees, for instance, eventually lands a temporary job. But it’s also the easiest avenue for companies to lay off staff that’s no longer needed.

The next gauge to react, according to the labor agency, is the number of employees whose working hours are cut to reduce costs during periods of weaker demand. The German government makes up for lost wages when this occurs, albeit not in full. The upshot for workers is they can keep their jobs; the downside is lower overall pay.

Companies must first file a notice with the labor agency when they plan such arrangements. Compared to a year ago, both notices and realized short-time work have increased.

Unemployment benefits are another area to watch. As employment terminations rise and the chances of finding a job decline, the total amount of people receiving payments from the government rises. That number has grown by 33,000 people -- or 5% -- from a year ago.

The labor agency sees one additional area of weakness. Unemployment within helper jobs -- or those suitable to workers with lower qualifications than needed for professional or expert positions -- is rising more than usual for the time of year. It’s the area with the fewest vacancies relative to the number of jobless people looking for such work.

Despite all those warning signals, the labor agency isn’t yet sounding the alarm. Employment continues to be strong, according to board member Daniel Terzenbach, in large part because skilled employees have become scarce and companies are still reluctant to dismiss them over what might turn out to be a temporary problem.

German Chancellor Angela Merkel acknowledged last month that the economic slowdown justified efforts to prop up domestic demand, but offered few new measures to provide an extra jolt.

A change in tune may be coming soon. Economists including Carsten Brzeski, chief economist at ING-Diba AG in Frankfurt, say it’ll just be a matter of time before the factory slump hits home.

“For a long while we had the story that ‘yes, there’s the trade conflict, there’s uncertainty coming out of China, but it’s only limited to the industrial, to the manufacturing sector in the entire euro zone, and that domestic demand was resilient,’” he told Bloomberg Television. “This domestic stronghold not only in Germany but in all other economies is crumbling.”

To contact the reporters on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net;Kristie Pladson in Frankfurt at kpladson@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow, Craig Stirling

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