The global economy remained sluggish in the first quarter of this year, but signs of improvement are emerging. Growth estimates for 2023 continue to point to a clear slowdown, but one less pronounced than was forecast last autumn. Cyclical developments are being affected by persistently strong inflationary pressures, the connected increase in interest rates and geopolitical tensions.
Starting in February and against a background of great uncertainty, the conditions on the global financial markets have deteriorated again. The recent bank crises in the United States and in Switzerland have led to a sharp increase in volatility, a higher risk of contagion and a significant rebalancing of portfolios from riskier assets towards those regarded as safer. Tensions have eased following intervention by the authorities.
The risks to financial stability remain significant in Italy too. The impact of the tensions on the international banking markets was modest, thanks to Italian banks' limited exposure to the failing banks and, more generally, to the strengthening of banks' balance sheets accomplished in recent years.
Public finance conditions improved in 2022. Net borrowing as a percentage of GDP and the debt-to-GDP ratio both fell, the latter by more than 5 percentage points. The consolidation of these trends continues to be key, also in light of the uncertainty over changes in the macroeconomic outlook and rising interest rates. In a context of prudent management of the public finances, the reduction in government bonds on the Eurosystem's balance sheet, conducted at a measured and predictable pace, should not have a significant impact on yields or on the functioning of the secondary market for Italian government securities, in which the yield spread compared with the corresponding German government securities has remained in line with the levels observed at the end of last November.
The real estate market is showing signs of a slowdown. In the second half of 2022, house prices rose, though at a slower pace than previously and well below consumer price inflation, while house sales declined, affected by the slowdown in mortgage lending. According to our estimates, nominal price growth is expected to remain weak this year too.
The worsening cyclical situation is having a moderate impact on the risks connected with households' financial situation. Liquidity remains high, but disposable income has declined in real terms due to inflation. The higher interest rates are affecting the average cost of outstanding loans and the share of financially vulnerable households might increase this year. In proportion to income, debt is nevertheless still well below the euro‑area average.
Firms' financial situation and their vulnerability are being affected by the worsening macroeconomic projections and the higher interest rates. Against the background of virtually unchanged demand, the growth in lending to firms gradually came to a halt in 2022 and is now in negative territory. However, the contraction only affected the riskiest firms and, among these, mainly the smallest ones. Bond issuance also slowed. Overall, despite deteriorating slightly, firms' debt servicing capacity is benefiting from the balanced financial situation, supported by the still broad liquidity margins. The share of debt ascribable to vulnerable firms may nevertheless rise over the course of the year, especially in construction and manufacturing.
The financial situation of the Italian banking system is sound overall. Asset quality does not show signs of worsening and profitability has improved, benefiting from the increase in net interest income. Despite the reduction in funding and the shift in the composition of customer deposits, banks' liquidity profile remains balanced for both short‑ and medium‑term maturities. Assets eligible as collateral for Eurosystem refinancing operations continue to be widely available.
The main sources of vulnerability for the banking system continue to stem from the weak macroeconomic outlook and global geopolitical uncertainty, compounded by the ongoing conflict in Ukraine. Any unrealized losses on the portfolio of debt securities, valued at amortized cost, would only materialize in a scenario - unlikely at the moment - in which financial intermediaries are forced to sell their securities before maturity. Profitability is expected to remain positive in 2023, though the ability of households and firms to repay their loans could weaken, with potential consequences for loan loss provisions, which are still at low levels. There may also be further upward pressures on the cost of funds, partly as a result of the need to continue to replace the funding acquired through the Eurosystem's third targeted longer‑term refinancing operations (TLTRO III) and to issue instruments that satisfy the minimum requirement for own funds and eligible liabilities (MREL).
The capitalization of the insurance sector declined, owing to interest rate dynamics, but is still high and close to the EU average. Profitability also decreased, while the liquidity position remains sound overall. In the life segment, however, customers' search for yields that protect the purchasing power of their savings kept premium income down and fuelled surrenders. Unrealized losses on the securities portfolio, which were mainly recorded by insurance companies operating in the life segment, decreased in the first three months of the year.
Net subscriptions to Italian investment funds turned negative in the first quarter of 2023, though net inflows were still recorded for equity and bond funds, especially for those that invest in accordance with environmental, social and governance (ESG) criteria. The degree of liquidity fell owing to the increase in interest rates, which discourages cash holdings. The risks facing the sector remain modest overall.
