With the outbreak of the war in Ukraine, uncertainty over the economic outlook and risks to financial stability have increased. Inflation is rising markedly in the main global economies because of increasing prices for energy and other commodities and continuing supply bottlenecks. Central banks have started or stepped up their return to less accommodative monetary policies. The ECB will maintain its flexible approach to monetary policy whenever threats to its transmission jeopardize the attainment of price stability.
Conditions on the global financial markets worsened after the invasion of Ukraine. Longterm interest rates have continued to go up in both the United States and the euro area, against a background of high volatility. The sizeable fluctuations in commodity prices have led to a considerable expansion in the margin requirements on derivatives for operators and to malfunctions on these markets. The emergence of new tensions could also hit firms that operate in these markets for hedging purposes.
The risks to financial stability have increased in Italy too, although they remain low compared with past episodes of tension. As in the other euro-area countries, in a context of heightened uncertainty, growth forecasts have been revised downwards and inflation expectations have gone up.
The slowdown in economic activity and the rise in interest rates could put pressure on the public finances. Since last November, the yield spread between Italian and German government securities has widened. Greater risk aversion and expectations of a reduction in monetary accommodation have been contributory factors. Nevertheless, although yields at issuance are rising, funding conditions on the primary market for Italian government bonds remain favourable overall. Despite the downward revision for economic growth, the Government has confirmed its objective of reducing net borrowing as a share of GDP.
The residential real estate market continues to recover gradually. The increase in prices is more limited than in other European countries and the risks to financial stability from this sector remain low. Uncertainty over the economic outlook is affecting the non-residential sector, where prices are still falling and the average riskiness of loans is relatively high compared with Italian firms as a whole and by European standards.
The risks to financial stability from the household sector continue to be low. In 2021, disposable income grew and confidence improved, but the war in Ukraine and rising inflation are having a negative effect on the outlook. The measures taken by the Government are helping to limit the impact of rising energy prices on the most financially vulnerable households. The total indebtedness of the household sector is still low by international standards and loan repayment capacity is adequate.
Firms’ financial vulnerability is increasing, despite the cyclical improvement in 2021. The spread between bond yields and the risk-free rates has widened, as in the rest of the euro area. The higher share of spending on energy products, difficulties in the procurement of commodities and intermediate goods, and, for some firms, the direct consequences of the sanctions imposed on Russia and Belarus have all had an impact. Exporters with the greatest exposure to the markets affected by the conflict account for a small portion of turnover and total bank loans.
Italian banks are stronger, but the repercussions of the war are causing risks to rise. In 2021, the asset quality of the banking system was still good on average, thanks to the economic recovery and the support measures for households and firms; lending increased for the soundest firms, especially the small ones. The new non-performing loan ratio remains at historically low levels; disposals of nonperforming loans continued. Banks’ profitability improved, mainly as a result of the decrease in loan loss provisions, and capitalization remained stable. However, the war represents a significant source of uncertainty for the banking system and could have significant consequences through multiple channels, both financial and economic. Direct exposure to Russian counterparties is limited overall, but is concentrated in two large groups; the conflict’s impact on them, while not negligible, seems in any case to be manageable. The risk of cyber attacks has also risen. The situation calls for cautious and careful accounting and prudential classification of loans and provisioning and distribution policies.
In 2021, the insurance sector’s capitalization and premium income continued to improve, while profitability declined. Insurance companies’ exposure to the effects of the conflict is moderate; the sector’s resilience was confirmed by the results of the recent stress tests.
The positive trend in net subscriptions of Italian investment funds has continued. The share of assets under management of funds potentially vulnerable to heavy demand for redemptions or to changes in the margin requirements on derivatives has fallen. Exposure to Russian, Belarusian and Ukrainian issuers is very small.