The world economy grew at a modest pace in 2024, with forecasts for 2025 pointing to continued sluggish activity, albeit with different trends across geographical areas. The wars in Ukraine and the Middle East and heightened geopolitical tensions still pose a risk to global economic and financial stability.
International financial markets benefited from increasingly less restrictive monetary policies, but they remain exposed to significant uncertainty, amid high levels of public debt in a number of countries and low risk premiums on some financial assets. In the United States, the presidential election results led to a rebalancing in investors' portfolios from government securities to equities.
In Italy, although the macrofinancial environment has been stable overall since the spring, there are still risks arising from severe international geopolitical tensions and fragile macroeconomic conditions. Looking ahead, lower interest rates could boost the economy.
Domestic financial market conditions remain favourable overall. The spread between ten-year Italian and German government bond yields narrowed further and market liquidity conditions remain relaxed. Volatility is still low, although it temporarily increased over the summer months amid global market turbulence.
House prices continued to rise in real terms, though they remained below pre-pandemic levels; by contrast, commercial property prices stabilized. Overall, the risk to financial stability in Italy posed by real estate market developments is still small.
The risks to the household sector remain limited, as a result of improved income and higher financial wealth. The reallocation of savings towards government bonds progressed further and investment in asset management products and shares resumed.
After a long period of growth, which had only paused during the pandemic, firms' profitability showed signs of deterioration. Macroeconomic weakness and high financing costs could weigh on the profits of highly leveraged firms. However, firms' ability to repay their debts remains good overall and the default rate on bank loans is still low.
The Italian banking system remains on a good footing. Profitability improved further in the first half of the year and is expected to remain high for the whole of 2024. The Eurosystem's unwinding of ample excess liquidity is proceeding smoothly. Looking ahead, a reduction in net interest income and higher loan loss provisions could have a negative impact on banks' profitability. Their capitalization rose, and for significant institutions it is higher than the average for their counterparts in the countries participating in the Single Supervisory Mechanism (SSM). Exposure to operational and cyber risks requires keeping close watch.
Insurers' capitalization fell slightly in the first half of the year, although it continues to be high. Profitability improved overall, but is still negative in the life business as a result of unrealized capital losses on the investment portfolio. The liquidity position remained sound, partly due to a recovery in premium income in the life business.
Net subscriptions to Italian investment funds turned positive, as inflows into bond funds more than offset outflows elsewhere. Risks remain low overall.
This year saw a further significant increase in placements of certificates, mainly purchased by households. These instruments, whose value is not easy to assess, may expose holders to large losses in adverse scenarios. The Bank of Italy has been warning of this for some time and continues to monitor any developments.
Three special-focus boxes are included in this Report. The first one describes the latest supervisory assessments of less significant banks, which show no material changes in their overall riskiness. The second one reports on the findings of an analysis of the relation between customers' propensity to use digital channels to transfer deposit funds and the stability of bank funding. According to these findings, during the interest rate hike cycle, there were no significant differences in sight deposit trends between banks with more digital-oriented customers and other banks; on the other hand, the former saw stronger growth in term deposits. The third box provides an overview of supervisory analyses of the stress tests carried out by the managers of potentially vulnerable open-end investment funds. These analyses point to areas for improvement, though fund managers' practices are essentially compliant with the regulations in force.
