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Resilience & Economic Caution for the UK & Euro Area

Resilience Shown by the US Labor Market as well

The Resilience of the economies for both the UK and EU are tested. Optimism for the US labor market as unemployment claims are down.

UK Economic Resilience and Achievements

In January 2023, the UK Prime Minister outlined crucial economic objectives: halving inflation, spurring economic growth, and curbing national debt. By October 2023, substantial progress was made, with inflation dropping from over 11% to 4.6%, the economy rebounding impressively, and anticipated steady growth.

Impact of UK Economic Policies

Strategies focus on five key areas: reducing debt, tax cuts, supporting British businesses, sustainable energy, and education. The Autumn Statement stresses prudent spending, foreseeing reduced borrowing and a 2.1% decline in debt as a GDP percentage. Tax reductions, including National Insurance Contributions cuts, aim to boost employment. Plans to raise the National Living Wage and reform welfare support vulnerable groups while incentivizing work.

Government Approach

Encouraging private sector investment through tax reforms and funding growth sectors like sustainable energy and technology underlines a commitment to a net-zero economy. The government’s approach targets economic strength, responsible debt management, business support, and sustainable growth.

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Recent US Unemployment Trends

In the week ending November 18, the seasonally adjusted initial unemployment claims were 209,000, down by 24,000 from the prior week, while the 4-week moving average decreased to 220,000. The insured unemployment rate remained at 1.2%, with a decrease of 22,000 in insured unemployment claims to 1,840,000 for the week ending November 11. However, the 4-week moving average rose to 1,836,750, the highest since December 18, 2021.

Deviation From Expectations

Unadjusted data saw an increase of 21,239 initial claims, totaling 238,677, deviating from the seasonal expectation. Insured unemployment rates stayed at 1.1%, with a rise of 75,088 in unadjusted claims to 1,654,019, higher than the seasonal expectation.

Continued weeks claimed for benefits in all programs decreased to 1,603,689. Initial claims by former Federal civilian employees increased to 655, while newly discharged veterans’ claims decreased to 330. Continued weeks claimed by former Federal civilian employees rose to 4,741, with newly discharged veterans claiming 4,043 weeks.

EU Measures for Financial Resilience

The European Central Bank’s November 2023 Financial Stability Review reveals a fragile outlook for the euro area’s financial stability. Tighter financial conditions are impacting the real economy amid weak growth, high inflation, and geopolitical tensions. Rising debt service costs are straining households, firms, and governments, especially visible in declining property markets. Non-bank financial institutions and markets remain sensitive to negative developments, emphasizing the need for resilience against liquidity and leverage risks.

Future Financial Resilience Recommendations

Euro area banks, while resilient post-pandemic, face challenges from higher funding costs, deteriorating asset quality, and reduced lending volumes due to rising rates and stricter credit standards.

While the banking system seems equipped to handle these risks, it requires strengthened buffers and measures to navigate the financial cycle. Implementing Basel III reforms and completing the banking union are crucial. Addressing structural vulnerabilities in the non-bank sector, like liquidity risks, remains essential to bolster overall financial system resilience.

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