The weakness of the world economy continued in the first quarter of the year, but signs of improvement are emerging. Growth estimates for 2023 continue to foreshadow a marked slowdown, but less marked than the expectations of a few months ago. Despite the uncertain context, the banking system, households and businesses are now more solid than in past episodes of turbulence. It is the photograph taken by Bank of Italy in the last Financial Stability Report. According to this semi-annual report, as for the other countries of the euro area, the increase in risks is mainly determined by the persistent geopolitical instability, the still high inflationary pressures and the associated rise in interest rates.
The conditions on financial markets have worsened again since last February. The recent episodes of banking crises in the United States (the bankruptcy of Svb) and in Switzerland (the collapse of Credit Suisse) led to a sharp increase in volatility, an increase in the risk of contagion and significant reallocations of portfolios from higher risk assets towards those considered safer. Tensions eased after the interventions of the authorities to contain the critical issues.
The risks to financial stability also remain high in Italy
In Italy i risks for financial stability remain high. The impact of the tensions on the international banking markets was limited, thanks to the limited exposures of Italian banks to intermediaries in crisis and, more generally, to the strengthening of balance sheets achieved in recent years. As for the other countries of the euro area, however, the persistent geopolitical instability, the inflationary wave and the slowdown in growth linked to the high public debt weigh.
According to the estimate of Economic and financial document 2023 (Def 2023) approved in April, GDP would expand by 1% in 2023 and 1,5% in 2024, slowing down compared to 2022. The projections, revised upwards compared to those released in November, are higher than those for the next two years recently published by the International Monetary Fund (respectively 0,6 and 0,9%) and by Consensus Economics (0,6 and 1%).
Improved public finance balances
The conditions of the public finance they improved in 2022. Both net debt as a ratio to GDP and the weight of debt on GDP decreased, the latter by more than 5 percentage points. “The consolidation of these trends remains fundamental, also in the light of the uncertainty on the evolution of the macroeconomic scenario and the rise in interest rates”, reads the report. “In a context of prudent management of public finances, the reduction of government bonds in the Eurosystem balance sheet, conducted at a measured and predictable pace, should not have significant repercussions on the yields and functioning of the secondary market for Italian government bonds, where the differential with respect to German bonds remains in line with the levels observed at the end of November".
The real estate markets
Il Real Estate Market shows signs of slowing down. In the second half of 2022, house prices grew less intensely and well below inflation, while sales decreased, reflecting the slowdown in mortgage disbursements. According to Via Nazionale estimates, the increase in nominal prices would continue to slow down not only this year but also in the following two years. The potential vulnerabilities deriving from the sector therefore remain contained.
The families
The deterioration of the economic situation has a moderate impact on the risks associated with the financial situation of the families. Liquidity remains high, but in real terms disposable income has decreased due to inflation. The increase in interest rates is being reflected in the average cost of outstanding loans and the share of financially vulnerable households could rise this year. In relation to income, however, debt remains much lower than the euro area average by more than 30 percentage points (62,5% at the end of the fourth quarter of 2022, from 64,4 in the same period of the year previous). After the pause due to the pandemic crisis, in 2022 loans for consumer purposes, which represent a quarter of total loans to households, continued to grow; in relation to disposable income they reached 12,8%, a value higher than the euro area average (9,6%).
Businesses
The financial situation and vulnerability of companies they are affected by the worsening of macroeconomic forecasts and the increase in rates by the ECB to cool the inflationary wave. With broadly unchanged demand, growth in corporate loans gradually stalled in 2022 and is now in negative territory. However, the decline only affected the riskiest companies and, among these, especially the smallest ones. The use of the bond market. Overall, the debt service capacity, albeit slightly deteriorated, benefits from a balanced financial situation, supported by still ample liquidity margins. Credit quality is still at historically high levels, but is showing the first signs of deterioration, particularly in the credit sectors manufacturing and construction. According to Bank of Italy projections, in a baseline scenario consistent with the slowdown in economic activity and high inflation, the share of debt held by vulnerable companies would rise to 27,7% at the end of the year, especially in real estate and manufacturing.
The banks
The conditions of the Italian banking system they are good overall. Asset quality shows no signs of deteriorating and profitability has improved, obviously favored by the increase in net interest income. Despite a reduction in the collection and a recomposition of the deposits of customers, the liquidity profile remains balanced on both short-term and medium-term maturities; the availability of assets eligible for refinancing operations with the Eurosystem remains ample.
The main sources of vulnerability for the banks they continue to come from the weak macroeconomic prospects and from the uncertainty of the international geopolitical situation, aggravated by the continuation of the war in Ukraine. “Any capital losses on the portfolio of debt securities valued at amortized cost would materialize only in the unlikely event that intermediaries were forced to sell the securities before their maturity”. There profitability it would remain positive also in 2023, but the ability to repay loans by households and businesses could weaken, with potential effects on value adjustments, which still stand at low levels. Further upward pressure on the cost of funding could also emerge, also due to the need to continue to replace the funds acquired through the extraordinary refinancing operations of the Eurosystem (TLTRO3) and due to the need to issue instruments suitable for satisfying the minimum requirement own funds and liabilities subject to bail-in (MREL).
Insurance
La capitalization of the insurance sector it decreased, reflecting the trend in interest rates and the early termination of life contracts, but remains at high levels, close to the European average. According to simulations by the Insurance Supervisory Institute (IVASS), which use scenarios in line with the shocks of the banking stress tests currently conducted by the European Banking Authority and the ECB, further rises in the rate curve could lead to a average decline in own funds of 7%.
Profitability has also worsened, while the liquidity position remains overall good above the European median (65% and 47% respectively); In the life sector, however, the search by customers for returns that safeguard the purchasing power of savings has slowed down premium collection and fueled the early termination of contracts, due to policyholder choices both due to greater liquidity needs generated by the changed macroeconomic framework, and for the search for more profitable alternatives to insurance investment products. Unrealized capital losses on the securities portfolio, mainly concentrated in companies operating in the life business, decreased in the first three months of the year. Market indicators in April show share prices and earnings expectations still growing for the insurance sector:
The asset management industry
La net inflows of mutual funds Italians was positive in the fourth quarter of 2022 (1,7 billion), to become negative in the first quarter of 2023 (1,5 billion). Inflows during the period as a whole were marginally positive (€200 million), reflecting inflows into equity and bond funds (€6,8 billion and €2 billion respectively) and outflows from flexible and balanced funds (€6,3 and €1,6 billion respectively billion). With a preference for those who invest respecting criteria of sustainability from an environmental, social and corporate governance (ESG) point of view. The degree of liquidity fell – going from 8,3 to 4,9% – due to the rise in interest rates, which discourages the maintenance of liquid assets. The risks of the sub-fund remain contained overall.
