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Italy’s central bank governor sees “significant” risks to the country’s fragile economy, with global headwinds such as the coronavirus outbreak adding to an already subdued outlook.
“Gross domestic product growth will still be very low this year,” European Central Bank Governing Council member Ignazio Visco said on Saturday in a speech to the Assiom Forex conference in Brescia, northern Italy. “This scenario is subject to significant downside risks.”
The warning comes after Italy’s economy recorded an unexpected 0.3 percentage-point contraction in the final quarter of 2019, casting doubt on whether the government target of 0.6% growth in 2020 can be achieved. Fitch Ratings on Friday maintained a negative outlook for Italy, while confirming its investment-grade credit rating.
Finance Minister Roberto Gualtieri, speaking later Saturday at the Brescia conference, tried to dispel the pessimism. He said the fourth-quarter contraction was partly due to calendar factors, adding that both the economy and public finances showed signs of a rebound at the beginning of 2020.
Visco highlighted that Italy’s performance remains dependent on its European and global partners. Financial conditions are benefiting from a reduction in political uncertainty.
“An additional risk factor has emerged in the form of the possible repercussions of the spread of the new coronavirus, especially for the Chinese economy,” Visco said. “The effect could be limited in the order of a few tenths of a percentage point of aggregate demand, but a larger impact cannot be ruled out.”
Visco also delivered a cautiously positive assessment of the state of Italy’s financial sector.
The ECB’s low interest-rate policy has had “practically no effect” on Italian lenders, he said, as banks offset their negative impact on net interest income with a “favorable impact on the quantity and quality of credit, together with an increase in fee income.”
While Italian lenders have improved their asset quality, curbing risks and cleaning up balance sheets, they are relying on continued cost cuts to bolster profit as low interest rates and a weaker Italian economy weigh on revenue. Fourth-quarter earnings cheered up investors with banks posting on average higher-than-expected profits and solid capital buffers. Still, the country’s lenders remain exposed to risks including slowing economic growth and stricter rules on capital provisioning.
Banks will have to prepare for regulatory changes, lining up capital and funding ahead of time, Visco said. In particular, small mutual banks, known as BCCs, which formed two new groups in 2019, “must now take swift action to cut costs and rationalize their distribution network.”
(Updates with Finance Minister Gualtieri’s comments in fourth paragraph.)
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