In 2023, the global economy slowed down and the growth forecasts for the current year, although revised slightly upwards, indicate that economic activity will remain weak overall. Over the past few months, the fall in inflation has come to a halt in the United States, while it has persisted in the euro area and the United Kingdom. There continue to be risks linked to the conflicts in Ukraine and the Middle East.
International financial market conditions have eased since last November, benefiting from expectations of a less restrictive monetary policy stance. Since the beginning of the year, however, interest rates on government bonds have turned upwards in the United States and this increase has spilled over to those of the other major world economies. The difficulties experienced in commercial real estate in some countries are also a source of vulnerability for financial intermediaries.
Despite high international geopolitical tensions, the risks to financial stability in Italy are declining somewhat, partly as a result of favourable market conditions. The yield spread between 10-year Italian and German government securities has narrowed since last November; liquidity conditions have improved further, with trading reaching a new all-time high last February. While still fragile, the macroeconomic situation has stabilized amid robust labour market conditions, disinflation taking hold and an improvement in the current account balance. In addition, the latest forecasts point to stronger growth in the second half of the year. However, a persistently high debt-to-GDP ratio remains a risk factor, particularly in the event of less favourable than expected developments in the economy.
House prices have continued to rise moderately in nominal terms and have also returned to growth in real terms, thanks to falling inflation. Sales have increased and the drop in prices has eased in commercial real estate. Overall, real estate market developments pose a low risk to financial stability in Italy.
Vulnerabilities in the household sector remain limited, although uncertainty about the economic outlook is still high. Financial wealth has increased, mainly as a result of the appreciation of financial assets, and savings have continued to shift towards time deposits and public sector securities. The ratio of debt to disposable income, already low by international standards, has fallen further. Credit quality remains good, although floating-rate mortgages are showing signs of slight deterioration due to high interest rates.
The overall stable cyclical situation and a longer average maturity of liabilities compared with the past have mitigated the impact of rising rates on firms' vulnerability, which is expected to remain limited, also going forward. Profitability continued to grow in 2023 and expectations for the current year are improving. Leverage declined as a result of capital strengthening and less recourse to debt. With high funding costs, cash reserves actually made it possible for firms to make early repayments of part of the loans obtained during the pandemic.
The financial condition of the Italian banking system remains sound. Profitability has increased significantly and is set to remain high in the current year too. The main sources of vulnerability are attributable to both the potential deterioration in loan quality and possible funding difficulties at a time when the Eurosystem is reabsorbing excess liquidity. In addition, the risks stemming from global geopolitical developments are not subsiding, which could have a significant impact on the macroeconomic outlook.
On 26 April, the Bank of Italy decided to gradually activate a systemic risk buffer (SyRB) to strengthen banks' resilience against any widereaching adverse events. If these circumstances were to materialize, the Bank of Italy would release the buffer, allowing banks to use these resources to absorb potential losses and to continue to finance the economy.
In the insurance sector, capitalization fell in the second half of last year, owing to the increase in the cost of non-life claims, but continues to be high. Profitability improved, driven by higher investment income and lower net unrealized losses on securities portfolios. The liquidity position remained sound overall, although surrenders in the life segment continued.
Net subscriptions to Italian investment funds were negative in the fourth quarter of 2023 and the first quarter of 2024, following the reallocation of savings towards direct investment in debt securities. Risks in the industry remain low.
