Editorial team
In Italy, “risks to financial stability caused by internal factors remain limited, while risks related to international instability cannot be ignored.” Since last spring “prices of the riskiest assets have risen significantly and volatility has returned to very low levels in international financial markets, despite continued geopolitical uncertainty and tensions”. This emerged from the Italian Central Bank’s financial stability report, which warned that “the risk of a sudden correction has increased”, “especially if assessments deviate from economic fundamentals”.
The large increase in import duties decided by the US government “resulted in a reconfiguration of trade”, explained the Bank of Italy. The final structure of trade relations “remains uncertain and the risk of new escalation remains high”. Additionally, the import duties “increase the risk of a global economic slowdown, even though the monetary policy of major central banks remains quite accommodative.” In Italy, financial market conditions “were overall relaxed and benefited from favorable trends in the Italian government securities market, the good performance of the banking system and increasingly improving credit dynamics thanks to the normalization of monetary policy”. At the same time, Italy’s economic growth prospects “remain limited and vulnerable to risks mainly caused by external factors”. On the one hand, the Bank of Italy explains, “stability of income from employment, low unemployment, a largely creditable net foreign position, and limited private debt are strong elements”. On the other hand, “high government debt is still a vulnerability factor”. The recommendation to ensure a “significant reduction” in public debt in relation to GDP is that “it is necessary to combine concrete measures to support growth with maintaining prudent management of public finances, which is one of the factors underlying the recent upward revision of the country’s credit rating”.
Since last spring, the spread between the Italian ten-year BTP and the German Bund has continued to contract, “as a result of a decrease in the yield on Italian ten-year government bonds and an increase in the yield on German bonds”. Thus, the spread has “returned to pre-sovereign debt crisis levels”. For the banking system, conditions are “overall solid: capitalization and profitability are at high levels and credit quality shows no signs of deteriorating”. Market indicators “remain favorable and generally outperform those of key euro area intermediates”.
The Bank of Italy warned that “profitability may be reduced: the decline in interest margins has affected its dynamics”. Risks related to the financial condition of families remain “under control”, considering that “in the first half of the year incomes continued to increase, supported by wage recovery and good employment trends”. However, “the perception of uncertainty regarding the economic outlook is still strong, reflected in the propensity to save which is still higher than before the pandemic”. For businesses, financial conditions “remain good on average, supported by profitability and limited debt” with limited impact of trade tensions so far, “but the sector remains vulnerable to uncertainty regarding economic growth trends and the possible impact of higher import duties and geopolitical conflicts”.
