ContextSpeech by the Governor of the Bank of Italy reviewing the world economy, between the Middle East energy shock and the spread of artificial intelligence.
Why it mattersThe Bank of Italy Governor's annual message to Italian bankers, with an inflation outlook and a warning that Italy gains less than others from AI.
- The Middle East conflict raised energy prices and uncertainty.
- Italy benefits less than others from AI investment.
- Inflation near 3% is expected to stay high until early 2027.
- Keep diversifying energy sources and suppliers.
- Encourage wider AI investment to lift growth.
- Keep monetary policy focused on returning inflation to target.
Read the speech summary
1. Two opposing forces
Addressing the annual meeting of the Italian Banking Association in Rome, the Governor of the Bank of Italy described a world economy pulled between the Middle East conflict, which raises energy prices and revives fears of bottlenecks, and the spread of artificial intelligence, which lifts investment, high-tech trade, share prices and, through wealth, consumption. The United States gains from low energy exposure and technological strength; China relies on manufacturing and tech exports but imports much of its energy. The euro area, already growing slowly, suffers from costlier energy despite more diverse suppliers, and benefits less from AI investment. Household confidence and services expectations have weakened, inflation is close to 3% and should stay above that until early 2027, and renewed hostilities have pushed oil and gas up again. The ECB's quarter-point rate rise in June was a first, measured answer to upside inflation risks; next steps will depend on energy, activity, wages and prices, with the goal of keeping expectations anchored.
2. Markets: a fast rebound, perhaps too fast
The US-Iran conflict that began in late February first caused volatility, falling shares, wider risk premiums, capital flight from emerging markets and higher rates. Hopes of a ceasefire then brought a rapid recovery, with some sectors at record highs and junk bond spreads back down, while government yields stayed above pre-war levels, especially where public finances are weak. He read this partly as an underestimation of risk: shares rose together with interest rates, earnings expectations are very high and equity risk premiums are at twenty-year lows, recalling how crypto-assets long ignored risk before falling. The dollar regained its role as a refuge, helped by oil invoicing in dollars and the US status as a net oil exporter.
3. The AI trade
Demand for AI services has pushed big technology firms to spend heavily on data centres, creating shortages of advanced chips, exceptional margins and soaring chipmaker shares. The boost has been largest in the United States and in Asian markets dominated by semiconductors, smaller in Europe, where gains came mostly from banks and energy firms. Prices of some chipmakers assume that today's margins will last, which new capacity, new competitors, including Chinese efforts, or alternative technologies could disprove. AI service providers face cheaper rival models while borrowing heavily to fund investment, which makes them more fragile if conditions tighten. Korean stocks, heavily exposed to data centre parts, recently dropped about 25%. Investors should manage exposures carefully where optimism is greatest.
4. Italian banks
Bank credit still matters more for Italian firms than elsewhere in large European economies, representing 46% of their financial debt. Energy costs raised firms' cash needs, and banks responded: annualised loan growth to firms rose from 2.3% in February to 6.2% in May, though a long war could make lenders more cautious. Profitability, capital and asset quality are strong, as confirmed by the IMF's recent assessment of Italy's financial sector. Net bad loans have fallen from over 8% of loans a decade ago to about 1%, helped by EU rules on full provisioning that are demanding given slow Italian courts; the Bank of Italy plans to extend this approach gradually to smaller banks' older loans. A few small banks have failed, some because of unlawful conduct, which shows that integrity and governance remain the first defence, since supervisors cannot replace boards or judges. Mergers among banks, insurers and asset managers can strengthen the system if capital, business plans and integration are sound and competition is preserved; the market and shareholders decide once legal conditions are met.
5. Financing innovation
Since 2008, firms in advanced economies have borrowed less from banks and relied more on equity, because rules made lending more selective, services need less credit and intangible assets such as software and patents are hard to value or pledge. Private equity and venture capital funds, whose global assets tripled to $10 trillion between 2014 and 2025, bring both money and expertise. In Italy these funds remain small, focused on restructuring deals and start-ups, so promising firms often go abroad when they need to scale up. Insurers and pension funds, natural long-term investors, place only 0.5% and 0.7% of their assets in private equity. Rules are not the main obstacle; the market is simply too small, creating a trap where scarce investors and small funds reinforce each other. Funds of funds with public support, simpler tax incentives, better financial education and a truly integrated European capital market could break it.
6. Conclusion
Risks cannot be removed, but resilience can be built. Stability is a condition for investment; banks will stay central, but deeper capital markets and more risk capital must complement them. Italy has strong banks, high savings and adaptable firms to build on.