Italian Economy Facing Downgrades Amid Inflation Worries

On Wednesday, rating company Moody's slashed its assessment of the country's banking system from "stable" to "negative", and said it expects conditions for the banking sector to deteriorate further over the coming 12 to 18 months, especially with regard to the performance of bank loans and broader earnings.

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The news came in the wake of a series of downgrades in medium-term growth prospects for the Italian economy from the Bank of Italy, Italy's National Institute of Statistics (ISTAT), Italian business lobby organization Confindustria, the Organization for Economic Cooperation and Development, and the European Commission.

In the most recent of these reports, ISTAT revealed that preliminary figures showed the economy grew by a stronger-than-expected 0.5 percent in the third quarter of the year. However, ISTAT expected economic growth over the fourth quarter to be negative.

The consensus among growth models is that the Italian economy will be flat next year after growth of around 3 to 3.5 percent this year. On Wednesday, Moody's was even more cautious, predicting 2.7-percent growth for this year as a whole, and zero growth in 2023.

The impacts of the Ukrainian conflict have pushed prices to record highs -- the latest data shows Italy's annual inflation rate hit 11.9 percent in October -- and sparked worries about access to energy and the reliability of key supply chains.

Additionally, the fact that the euro currency has mostly traded in negative territory compared to the U.S. dollar since August has eroded the buying power of the Italians.

The tweet reads, "You won't steal our future!" The Italians take sides against energy prices and inflation. In Palermo, protesters took to the streets to demonstrate against the surge in electricity and gas prices and inflation in Italy."

On Monday, Bank of Italy Governor Ignazio Visco called for the European Central Bank to raise interest rates in order to defend the euro against the dollar and other currencies. 

These factors have contributed to a broad decline in stock prices -- the Italian Stock Exchange in Milan is down nearly 20 percent this year, despite minor gains in recent sessions -- and an increase in yields for government bonds.

Italy's benchmark ten-year bond has traded almost exclusively above the 4-percent threshold since late September, and was at 4.3 percent at the close of Wednesday's session. Aside from a brief spike in June, the yield had not topped 4 percent in Italy since 2014. Higher bond yields are a reflection of investor nervousness about an economy.

Italy has Europe's fourth largest economy, and is the third largest economy in the 19-nation eurozone. According to the most recent estimates, the country's economic growth rate this year should surpass the eurozone average, before falling back below the average in 2023.