(Finance) – The global economy is slowing down and growth prospects are conditioned by strong geopolitical tensions and the deceleration of economic activity in China. Inflation in advanced countries is decreasing but still higher than the objectives of monetary policy, which remains restrictive. Fears of a more protracted monetary restriction than expected have led to a worsening of the conditions of the international financial markets since last summer, largely reabsorbed in recent weeks. In long-term government bond markets, especially in the United States, rates have risen sharply and volatility remains high. This is what emerges from second Financial Stability Report 2023 of the Bank of Italy.
In Italy risks to financial stability benefit from improvement in the conditions of the banking system and the low level of private sector indebtedness, but the macroeconomic context remains uncertain. In addition to the weakness of the global economy, the high public debt – for which the programmatic framework recently published by the Government envisages an only marginal decline in the next three years – and fears of a return to a structural condition of low growth weigh heavily.
The liquidity and functioning of the secondary market for government bonds they were not affected by the reduction in securities held by the Eurosystem, which was more than compensated by the increase in purchases by families. Although favourable, liquidity conditions – underlines Bank of Italy – are nevertheless particularly sensitive to news relating to the global economy and budget policy, as well as to monetary policy decisions.
THE housing prices they continued to rise, although at a slower pace than last year and well below inflation. The slowdown is expected to continue in 2024. Sales continued to decline, also following the worsening of credit access conditions.
THE risks coming from the household sector remain contained. Their financial wealth grew in the first half of the year; Given the low interest rates on sight deposits, families have reduced their amounts and increased investments in financial assets. The ratio between debt and disposable income, already low by international comparison, has fallen. The credit deterioration rate however, it rose, particularly in the food sector variable rate mortgages.
The economic slowdown and the increase in financing costs are impacting the financial situation of companies, the risk of which remains overall limited. Credit has reduced significantly as a result of higher costs, lower financial needs for investments and the increase in repayments of publicly guaranteed loans taken out during the pandemic. Debt-to-GDP ratio continued to decline, remaining well below the euro area average; debt service capacity remains good. However, the increase in the cost of financing could lead to an increase in the rate of loan deterioration in 2024.
THE main risks for the banking system continue to depend on weak growth prospects. Although asset quality has so far shown only slight signs of deterioration, the deceleration of economic activity and the high level of interest rates may lead to a worsening of debtors’ ability to meet their obligations. There profitability increased sharply, favored by the good performance of the interest margin, but in the next two years it will be affected by the higher cost of funding and a higher rate of deterioration of loans. The liquidity profile remains balanced; the repayment, in June, of a significant amount of the targeted longer-term refinancing operations (TLTRO3) did not have any significant repercussions. Capital ratios have improved. A stress test conducted on the banks supervised directly by the Bank of Italy shows that overall they would be able to withstand the impact of adverse macroeconomic scenarios, in line with what has already been found for the larger groups in the exercise conducted in recent months at European.
In the first nine months of the year the capitalization of the insurance sector has grown, benefiting from the increase in the value of investments. In the first half of the year, profitability improved, although it continues to be affected by unrealized capital losses on portfolio securities. The liquidity position remains good overall, although the decline in premium income and early terminations of contracts continued in the life sector.
There net collection of Italian mutual funds it was negative in both the second and third quarters of the year, affected by the uncertainty associated with the macroeconomic situation and the rise in interest rates; the outflows are mainly attributable to retail savers. The funds increased investments in government bonds and bonds with high credit ratings, reducing their liquidity. The risks of the sector remain limited.