Italy: U.S. Tariffs Pose Some Risks to Economic Growth and Banks' Asset Quality

The U.S. Trump administration could introduce additional tariffs impacting U.S. imports from the European Union (EU) in coming days, following the recent announcement of a 25% tariff on automotive imports from 2 April onwards. This comes after the widespread application of tariffs on steel and aluminium and EU announced targeted retaliation. As highlighted in our commentary EU: Sharply Higher Tariffs on U.S. Auto Imports Affect EU Countries and Carmakers in an Uneven Manner, Italy is not among the countries that could be most impacted by this measure due to the smaller relative size of its automotive industry. Still, given Italy's exposure (BBB (high), Positive) to the U.S. market, the threat of additional tariffs poses risks to Italy's already low economic growth expectations. We estimate that blanket tariffs of 10%, leading to lower demand from the U.S. market, could initially shave-off 0.1% of Italy's value added, although the impact on the specific sectors could be significantly higher. We note that this what-if analysis is subject to significant uncertainty and that the ultimate impact will depend on the size, scope, and duration of the tariffs, as well as the risks of retaliation. Furthermore, the impact from tariffs on confidence and investment could lead to a significantly higher impact overall.

While tariffs could initially add pressure to inflation and slow down the downward path in interest rates, with positive implications for banks' net interest income (NII) in the near term, we expect increased risks to their asset quality profile if the trade war were to drag on, threatening Italy's future economic prospects. Nonetheless, Italian banks enter this phase of uncertainty with stronger balance sheets and more robust capital buffers over supervisory requirements than in the past.

Key Highlights
-- Italy's exposure to the U.S. market is one of the highest of the four largest EU economies.
-- We estimate that blanket tariffs of 10%, leading to lower demand from the U.S. market, could initially shave-off 0.1% of Italy's value added, although the impact on the specific sectors could be significantly higher.
-- The imposition of tariffs increases the risks to banks' asset quality, but they enter this phase with stronger credit fundamentals.

"Despite Italy's exposure to the U.S. market, we have estimated that blanket tariffs of 10%, leading to lower demand from the U.S. market, could initially shave-off 0.1% of Italy's value added. We note that this is subject to significant uncertainty and the impact from tariffs on confidence and investment could lead to a significantly higher impact overall," said Javier Rouillet, Senior Vice President, Global Sovereign Ratings.

"Given the trade links between Italy and the U.S., Italian banks' exposure to sectors likely to be most affected by tariffs appears to be sizeable, adding potential pressure to their asset quality profile if the trade war were to be prolonged, threatening Italy's future economic prospects. Nonetheless, Italian banks enter this phase of uncertainty with stronger balance sheets and more robust capital buffers over supervisory requirements than in the past," noted Andrea Costanzo, Vice President, European Financial Institution Ratings.