Who Will Keep The German, And Thus Europe's, Economy Running?

Tyler Durden's picture

After a significant slowdown in the years before the crisis, Goldman Sachs notes that the number of immigrants coming to Germany is rising strongly again. While it is not clear at this point how sustainable this development is, it will nonetheless help to ease the strains in the German labour market. But, given the underlying demographics, we suspect, like Goldman, that an increase in immigration by itself is unlikely to prevent a meaningful decline in the labour force after 2020. Only a continuous rise in the participation rate can offset these demographic trends.

Via Goldman Sachs: German demographics and crisis-related immigration

 A strong rise in immigration

 

As the economic situation in peripheral countries deteriorates, an increasing number of people are migrating to Germany. While the number of immigrants from Greece, Italy, Spain and Portugal stood at around 41,000 in 2007, this number more than doubled in 2011. Numbers for the first half of 2012 point to a further acceleration of this trend in 2012 (see Exhibit 1).

 

 

But people are not only moving from the Euro area periphery to Germany. Total net immigration rose from just 11,000 people in 2008 to around 279,000 in 2011. If we extrapolate the figures for the first half of 2012, total net immigration could even rise to more than 360,000 this year (see Exhibit 2). To put this into perspective, net immigration into the UK for the 12 months up to March 2012 (the latest data available) stood at 183,000.

 

 

One immediate effect of this increase in immigration is an easing of some of the strains in the German labour market. These strains have become more visible over the last two years and the current cyclical weakness – which we expect to be temporary – has not changed the fundamental picture in any meaningful way.

 

The unemployment rate, for example, was 6.9% in October, only marginally above its record low of 6.8%. Note that the national definition of the unemployment rate is rather strict. Using the ILO definition, the German unemployment rate was only 5.4%; the respective figures for the UK and the US are 7.8% and 7.7%. Moreover, the national figures blur some significant regional differences, with unemployment rates in Southern Germany (Bavaria and Baden Württemberg) well below 4%. Finally, the number of vacancies stood at a level of 459,000 in October, compared with an average figure of 364,000 since 2000.

 

Long-term decline in population and workforce

 

These strains in the German labour market are set to become even more significant in the coming years due to weak demographics, which if current trends continue would lead to an overall decline in the population.

 

Exhibit 3 shows two different population scenarios based on the latest population projection from the German statistical office. Under its base scenario, which assumes a broadly unchanged fertility rate of 1.4 and a net immigration of 100,000 per year, the population would decline from around 82mn currently to 80mn by 2020 and 70mn by 2050. Under a ‘high fertility and high immigration scenario’, assuming a fertility rate of 1.6 and annual net immigration of 200,000, the decline in the population would slow, although the population would still be expected to decline to below 80mn by 2030 (see Exhibit 3).

 

 

Even more significant than the overall decline in the population would be the shrinkage of the working age population. According to the statistical office’s base case, the working age population – we assume here that this would be everyone aged 20-67 – would decline from around 51mn currently to 50mn by 2020 and 42mn by 2050 (Exhibit 4). Again the 'high fertility, high immigration scenario' looks more benign, although it still implies a big decline in the labour force after 2020.

 

 

Population size and labour force: No perfect correlation

 

Such long-term simulations are necessarily fraught with uncertainty. This is particular true for the estimation of the labour force, which is not only determined by the overall size of the population, but also by other social-demographic factors such as the retirement age and the participation rate (the share of people in the working age population that are working). Because of this, population and labour force can diverge, and indeed such a divergence has been observed in Germany over the last ten years. While there was a decline in the overall population, the labour force reached a record high (Exhibit 5) as the share of the labour force in the total population rose from below 52% in 2000 to 53.5% now.

 

 

What matters ultimately, however, is not the labour force but the total number of hours worked, which is the number of people in the work force times the average annual working hours. An increase in the number of hours worked provides a further buffer to a decline in the population or the labour force.

 

 

How difficult would it be to keep the total number of working hours constant until 2020? The short answer is: not that difficult. Exhibit 6 shows two different scenarios for the number of total hours worked in the German economy. The base scenario assumes a gradual decline in the population in line with the base case projection of the statistical office and no change in either the participation rate or the average working hours. The other scenario assumes an annual increase in the participation rate of 0.1% to 54.4% by 2020 and an increase in the average annual working hours by 0.1%. Furthermore, it is assumed that net immigration rises to 200,000 per year from 100k in the base case. Under this scenario, the total number of hours worked increases by around 1% from 2011 until 2020. What this shows is that the weak demographics would not necessarily also lead to a decline in labour input, and thus the potential growth rate of the German economy. Which scenario will play out in the end, however, also depends on the flexibility of the German labour market to accommodate an increase in the participation rate.

 

Source: Goldman Sachs