Context

In 2015, world economic growth slowed dramatically. Among the five growth drivers of the Brics group, two of them (Brazil and Russia) have slipped into recession, and China saw its growth rate halve. Based on the “Financial Stability Report no. 2 – 2015” published by the Bank of Italy in November 2015, we can draw the following conclusions on the state of the world economy:

  • global risks are mounting and the international scenario faces growing uncertainty, which could cause turmoil in financial, commodity and forex markets;
  • on the other hand, in the euro area tensions somewhat eased. There is less uncertainty about Greece, and the recovery in production as well as the extraordinary monetary policy measures are contributing to mitigating risks. Inflation remains stubbornly low, making deleveraging harder in both the public and private sector.

The latest data from the euro area point to GDP and industrial production growth, buoyed by declining unemployment. The launch of the ECB's Quantitative Easing (QE, i.e. the European Central Bank's programme to buy government bonds) has positively influenced medium/long-term inflation expectations, bringing them closer to the 2% target. It also contributed to reversing the negative trend in oil and, more generally, energy prices. The stock market reacted positively, with interest rates falling across all maturities and the 3-month Euribor currently below zero.

In Italy, the firming economy is gradually reducing the risks of financial instability. Lending conditions are improving, and bank loans should return to growth in 2016. Private sector lending as a proportion of GDP is still below the long-term average, but overall fiscal sustainability indicators remain favourable.

Economic activity expanded again in early 2015, rising at an annual rate of 1,5%. The most recent indicators - industrial production, the growing confidence of households and businesses, and purchasing manager surveys - point to growth in the third quarter consistent with that registered in the first half of the year. The upturn is also the result of the recovery in consumption and the gradual return of investments in fixed capital after years of falling domestic demand. According to the latest surveys, most companies believe that China's slowdown has only had a limited impact so far on their business (it materially affected only a few large exporters).
The rising disposable income and low interest rates are bolstering household balance sheets, which were already robust. Even low-income households are now less vulnerable and leverage remains low, although mortgages have recovered strongly.

Market liquidity conditions in Italy have eased after the turmoil registered during the summer, caused by Greece's debt crisis and the stock market crash in China. The purchases made by the Eurosystem have not affected the normal functioning of the market for Italian government bonds. At over 400 billion Euro, and over 10% as a proportion of total assets, the securities portfolio remains large.

As for the banking system, since the 2007-2009 crisis, banks have been the focus of an increasingly complex re-regulation and supervisory process. At the end of November 2015, the EBA published the results of the stress tests conducted on 105 banks in 21 EU member states: they revealed that at the end of June 2015 lenders were more capitalised than in the past, but non-performing loans were still climbing. Italy currently faces a predicament. Non-performing loans are three times greater than the EU average: they represent 16,7% of total loans and amount to 17,1% as a proportion of GDP, compared to an EU average of 5,6% and 7,3%, respectively. The low profitability—dragged down by credit risks—and the high level of non-performing loans are the Achilles' heel of Italian banks.

As for funding, as already seen in 2014, bonds continue declining while bank current accounts are rising, consistently with a scenario of particularly low and unattractive interest rates. The liquidity received from the ECB has decreased compared to late 2014, as the 3-year LTRO loans have reached maturity and have only been partly offset by the amounts obtained in the MRO and TLTRO auctions. There was instead a reversal in international funding: after almost 3 years of declines, in February 2015 it started growing again, driven by interbank lending.