In 2006 Lombardy's GDP increased by 2.3 per cent, that is at a slightly faster pace than the national average. The leading indicators point to a further acceleration in the early months of 2007.
In industry value added increased by 3.2 per cent, following the sharp contraction of the previous year. The steady growth in orders, particularly from abroad, was accompanied by an increase in output that has continued, albeit at a slower pace, into the first quarter of 2007. Given the large margins of unused production capacity, which diminished gradually during the year, investment spending remained slack. Output stagnated in the construction industry, mainly owing to the decline in public works. In the service sector, value added grew by 1.9 per cent, partly as a result of the recovery in retail sales and faster growth of orders in the innovative branches.
The growth in output was boosted by export demand, particularly from Germany and the most dynamic markets, such as China, central and eastern Europe and the new EU members, which are rapidly gaining importance. Exports rose by 9 per cent at current prices, compared with 7.7 per cent in 2005, in line with the national average. Despite the recovery, the region's share of world exports declined.
In 2006 the region's economy grew at a much faster pace than at any time in the previous five years. Between 2000 and 2005, output growth averaged less than 1 percentage point each year and labour productivity declined by 0.2 per cent, down with respect to the national average and that of the leading European countries. From 2000 to 2004, value added contracted most sharply in the traditional branches of industry (-3.5 per cent a year), although even the high-tech sectors showed signs of weakening, with the 1.5 per cent growth in output accompanied by a 0.3 per cent contraction in productivity. The region's productive structure progressively moved into line with the country's average.
The 2006 recovery could be due in part to structural improvements in firms' ability to tackle competition on domestic and foreign markets. Indications that restructuring is under way are confirmed by a survey of Italian industrial firms conducted by the Bank of Italy, in which 350 firms in Lombardy with 20 or more employees took part. Almost half of them made changes to their corporate strategy between 2000 and 2006, enlarging their range of products and in a quarter of cases improving their IT content. Some 8 per cent made investments in their trademark and a similar proportion in internationalization. Firms in Lombardy tend to be more oriented towards innovation and foreign expansion than the average for the country. More than a third of them believe it was their strategy rather than demand developments that had the greatest bearing on turnover in 2006. The survey indicates that a generational change is under way; the structure by age and educational qualification of entrepreneurs in Lombardy has shifted towards the younger and better educated cohorts.
The region's economy still lags behind that of the most advanced areas of Europe in some respects. The proportion of people with a higher-education diploma or university degree is greater in Lombardy than in Italy as a whole, but less than the European average. In terms of quality, the gap with the leading countries appears widest in the case of university education. Moreover, the proportions of skilled workers, investment in R&D, particularly in private companies, and innovative capacity do not reach the average for Europe. The infrastructural endowment, particularly of roads, is insufficient.
The liberalization of important sectors of the economy proceeds slowly. In the wholesale and retail sector, the regulatory framework appears to be more competition-oriented than in the other regions of Italy, but quantitative restrictions on the expansion of large retail outlets are still in place. In local public services the introduction of new competitive elements was limited.
Employment growth accelerated in 2006; this was combined with an increase in the supply of labour, bringing the unemployment rate down to 3.7 per cent. The gap in the participation rate with respect to the leading European countries is closing: the overall employment rate rose to 66.6 per cent and for women to 56.5 per cent, just 2 percentage points below the EU average.
Lending to the regional economy grew by 12.7 per cent, the largest increase since the end of 2001. There was a surge in demand for short-term credit, which is associated with a recovery in output. The upturn in overall lending concerned chiefly the corporate sector, mainly manufacturing firms, while lending to consumer households slowed. Credit conditions remained easy. Firms maintained their capacity to repay loans, partly thanks to the sustained improvement in their financial conditions in recent years.
Bank fund-raising in the region showed signs of recovery, with very substantial increases in the volatile repos segment. Net flows of funds for individual portfolio management were negative in the case of banks and investment firms, but positive for asset management companies; overall, the increase in managed funds was modest. By contrast there were large outflows from investment funds, a result that remains negative even including net funds placed with foreign companies belonging to financial groups in the region. Households' direct holdings of securities, particularly government paper, picked up. A considerable volume of funds was invested in insurance products. These trends have been present for a number of years and have been to some extent the result of lacklustre performances on the part of money market funds.
The majority of banks adapted their internal credit rating procedures during the year to improve customer selection, partly with a view to the introduction of the new regulations on capital requirements. Almost 90 per cent of banks in the region make use of corporate rating models, which were only set up recently, mainly between 2003 and 2004. They are employed when deciding whether or not to grant financing, the amount of the loan and, in the case of small firms, the nature of collateral. By contrast they play a less important role in establishing the terms and conditions and duration of loans. The information used in these credit rating model relates to the firm's balance sheet and its relations with the bank and the banking system; other information available at the level of the banking group is used only very rarely.
The regional credit market has been extremely dynamic, not only in terms of the number of mergers taking place but also because of the extensive redistribution of market shares. Since 2000 the leading banks have lost almost 10 percentage points to smaller banks and above all to foreign institutions. There have been numerous entries of foreign operators since the mid-1990s; they have stepped up their supply of products and services, including in the retail segment. As far as personal mortgages are concerned, the last few years have seen a substantial increase in the variety of contracts and an improvement in their terms and conditions.
