Press comment: Italy at a critical juncture as economy shrinks in Q3
If you’re covering today’s downward revision to Italian Q3 growth and the wider economic challenges it faces, please see the following commentary from Hinesh Patel, portfolio manager at Quilter Investors, the multi-asset investment business. Hinesh covers a range of topics including:
- The recent bond issue which saw the lowest demand ever
- Domestic private sector ability to match or offset the European Central Bank purchases
- Banks curbing credit to the real economy
“Italy is at a critical juncture. Since the financial crisis it has made far less progress than all of its larger European neighbours. The economy carries the heavy baggage of public sector debt that, without a combination of rising growth or inflation, seems unlikely to be resolved. The nation has been allowed to borrow above its means thanks to an environment of record-low borrowing costs courtesy of the European Central Bank.
“The populist government has proposed increasing public borrowing to fund investment, but the proposals breach European spending rules which the European Commission has rejected. That stand-off creates friction, and markets have echoed that by demanding the Italian government pay higher interest rates for new debt.
“Italian banks buy and hold material quantities of the nation’s debt. As the yields rise Italian banks’ solvency becomes ever more questionable. This in turn has a feedback to the real economy with banks curbing credit to the real economy. Today we’ve seen the economic growth rate for Q3 come in lower than expected. Indeed, the economy actually shrank between July to September. And that is before the impact of these rising bond yields has really rippled through into the wider economy.
“Last week the Italian government issued a fresh round of debt, its means of raising funds to keep the country running, but found limited demand for the securities. The bonds saw their lowest demand ever since they were first issued six years ago. The domestic private sector, including banks, just does not appear to have the savings & liquidity required to match or offset the European Central Bank’s purchases that have done such a fine job at keep borrowing rates low.
“To what extent should this be a cause for concern? In the long-term, very. For now it is worth remembering that most countries in Europe, including the UK, have been subject to Excessive deficit procedures and the European Commission rejecting the budget is a sign that it is exercising its mandate to oversee spending plans among member states. That should be seen as a good sign that after the ECB steps away there is a supra-national entity trying to keep checks and balances to preserve some semblance of stability.”
Notes to editors
Quilter Investors is part of Quilter plc. It provides multi-asset investment solutions designed for advised clients in the UK and internationally and manages 18.8bn on behalf of its investors (as at 30 September 2018).
Quilter plc is a leading wealth management business in the UK and internationally, helping to create prosperity for the generations of today and tomorrow.
Quilter plc oversees £118.1 billion in customer investments (as at 30 September 2018).
It has an adviser and customer offering spanning: financial advice; investment platforms; multi-asset investment solutions and discretionary fund management.
The business is comprised of two segments: Wealth Platforms and Advice and Wealth Management.
Wealth Platforms includes the Old Mutual Wealth UK Platform; Old Mutual International, including AAM Advisory in Singapore; and the Old Mutual Wealth Heritage life assurance business.
Advice and Wealth Management encompasses the financial planning network, Intrinsic; Quilter Private Client Advisers; discretionary fund management business, Quilter Cheviot; and Quilter Investors, the Multi-asset investment solutions business.
The Quilter plc businesses are being re-branded to Quilter over a period of approximately two years:
• The Multi-asset business is now Quilter Investors
• Intrinsic to Quilter Financial Planning
• The private client advisers business is now Quilter Private Client Advisers
• The UK Platform to Quilter Wealth Solutions
• The International business to Quilter International
• The Heritage life assurance business to Quilter Life Assurance
• Quilter Cheviot will retain its name
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