The global economy is slowing down and the strong geopolitical tensions and the deceleration in economic activity in China are weighing on the growth outlook. Inflation is declining in the advanced economies, but it remains above the targets of monetary policy, which continues to be tight.
Concerns about a longer than expected period of monetary tightening have led to a worsening of global financial market conditions since last summer, although they have largely improved in recent weeks. Interest rates have risen sharply and volatility remains high in long-term government bond markets, especially in the United States.
In Italy, the risks to financial stability are benefiting from the improvement in the conditions of the banking system and from the low level of private debt, but the overall macroeconomic picture remains uncertain. In addition to the weakness in the global economy, there is considerable public debt - which the Government's recently published Update to the 2023 Economic and Financial Document envisages will fall only marginally over the next three years - and fears of returning to structurally low growth.
Liquidity and the functioning of the secondary market for government securities have not been impacted by the reduction of government bonds on the Eurosystem balance sheet, which has been more than offset by the increase in purchases by households. Although favourable, liquidity conditions are extremely sensitive to global economic news, to fiscal policy and to monetary policy decisions.
House prices have continued to grow, albeit at a much slower pace than in 2022 and well below inflation. The slowdown is expected to continue in 2024. Sales are still decreasing, also owing to the tightening in financing conditions.
The risks stemming from the financial situation of households remain limited. Household financial wealth increased in the first half of the year; against a backdrop of low interest rates on sight deposits, households have reduced their holdings in these accounts and have shifted towards financial assets. The ratio of financial debt to disposable income, already low by international standards, fell. However, the loan default rate rose, especially for adjustable-rate mortgages.
The economic slowdown and the high financing costs are having an impact on the financial situation of firms, whose riskiness is in any case still limited overall. Lending contracted significantly owing to higher costs, lower financing needs for investment and the increase in repayments of the public-guaranteed loans obtained during the pandemic. The debt-to-GDP ratio continued to decline, remaining wellbelow the euro-area average; debt servicing capacity remains good. The increase in financing costs could, however, cause the loan default rate to rise in 2024.
The main risks to the banking system continue to stem from the weak growth outlook. Although banks' asset quality has only shown slight signs of deterioration up until now, the deceleration in economic activity and the higher interest rates could hamper borrowers' ability to service their debt. Profitability rose sharply, helped along by the positive trend in net interest income, but it is projected to be affected by higher funding costs and a higher loan default rate over the next two years. The liquidity profile remains balanced; the repayment, in June, of a sizeable amount of the third series of targeted longer-term refinancing operations (TLTRO III) did not have a significant impact. The capital ratios have improved. The recent stress test on the banks directly supervised by the Bank of Italy shows that overall they would be able to weather the impact of adverse macroeconomic events, in line with what was already found for significant groups in the EU-wide stress testing carried out in recent months.
In the first nine months of this year, the capitalization of the insurance sector rose, reflecting the growth in the value of investments. Profitability improved in the first half of the year, although it continued to be affected by the unrealized losses on the insurers' securities portfolios. The liquidity position has remained solid overall, although in the life sector premium income has continued to fall and contract surrenders have persisted.
In the second and third quarters of 2023, net subscriptions of Italian open-end investment funds were negative, reflecting the uncertainty connected with the macroeconomic outlook and the increase in interest rates. The outflows were mainly attributable to retail investors. Investment funds increased their holdings in government securities and investment grade bonds, reducing their cash holdings. The risks in this sector remain low.
The Bank of Italy has recently reviewed the methodology for identifying systemically important institutions at national level (O-SIIs) and calibrating their capital buffers, identifying seven O-SIIs for 2024. With the introduction of the new buffers, the macroprudential requirements imposed on Italian O-SIIs are close, on average, to those applied to other European O-SIIs with similar risk profiles.
