The economy of Veneto grew more slowly last year than in 2006, when a broad-based recovery interrupted a long period of stagnation. The rise in commodity prices and the strains engendered in the international financial markets by the US mortgage crisis progressively weakened domestic and foreign demand, while the appreciation of the euro undercut the international competitiveness of the region's goods. The growth rate of the regional economy began to diminish in the spring; the decline sharpened in the final part of the year and the first quarter of 2008.
Industrial activity in Veneto, which depends significantly on the conditions of world demand, slowed down, particularly in the personal and household goods industries in which the region is traditionally specialized. The metal products, mechanical machinery and electrical machinery industries maintained a more stable path of growth thanks to persistently strong demand for investment goods coming from the emerging countries of Eastern Europe and Asia. Export growth fell sharply, especially to the EU countries, where sales of fashion goods contracted.
Firms' widespread perception of a deterioration in the cyclical situation, which was accompanied by a decline in the capacity utilization rate, progressively eroded the industrial investment cycle.
The output of the construction sector declined slightly. The rise in borrowing costs undercut the demand for housing, while the consolidation of the public finances constrained public-sector investment. The Report's special section on investment in infrastructure describes how public expenditure on civil engineering works in Veneto, consistently below the national average in the second half of the 1990s, rose significantly in subsequent years until it reached the national average.
Especially in the early part of the year, the service sector benefited from the growth of household consumption, which sustained retail trade and tourism, and from the overall economic expansion, with its positive effects on the transport sector. International tourism again made an important contribution to economic growth.
Labour market conditions improved further, with a fall in the unemployment rate and a slight rise in the employment rate. Influenced by the evolution of the cyclical situation, employment growth weakened in the second half of the year, which also saw a slight rise in recourse to social shock-absorbers. A widespread presence of foreigners characterizes the regional labour market by now. Their participation and employment rates are higher than the averages for Italians, partly because a larger share of the immigrant population is of working age. The percentage of foreign workers is higher than the national average in the construction and industrial sectors, which employ more than half of all the foreign workers in Veneto.
The financial sector provided a large supply of credit, as it has done for the last five years. Bank lending to firms grew further, fueled by demand from building and real-estate firms and by manufacturing and service companies' need to finance investment and working capital, especially in the first half of the year. By contrast, lending to households slowed down, especially for house purchases.
Bank lending rates rose with the increase in monetary policy reference rates and, in the final part of the year, owing to the rise in interbank rates triggered by the international financial crisis. Still, in the last three years interest rates on bank loans to firms in Veneto have increased less sharply than the national average, thanks in part to the curbing of the ancillary charges included in computing interest rates.
The quality of bank loans remained satisfactory as a whole, although some indicators signal a slight increase in banks' risk on loans to firms in the building and real-estate sector and to consumer households.
Bank funding benefited from a recovery in issues of bank bonds targeted to customers. The attractiveness of these issues was enhanced by the rise in interest rates. For the same reason, households preferred to invest their financial wealth in fixed-income securities, while equities were placed at a disadvantage by the decline in share prices. Investment in individually managed portfolios, investment funds and insurance-based products continued to fall. The Report's special section on the evolution of household wealth documents the smaller amount of such wealth by comparison with the other regions of the North and the larger share held in the form of cash and deposits on the one hand and retirement savings (pension funds and life insurance policies) on the other.
Although per capita primary current expenditure of local government in Veneto remained below the average for the ordinary-statute regions, in the three years 2004-06 it rose faster and also outpaced nominal GDP. One factor was the growth in the costs of the regional health service, which began to accelerate again after slowing in 2006. The regional government ensured the financial equilibrium of the health service, in part through tax measures the receipts from which went largely to cover health care deficits.
Local government investment, which had fallen in the two years 2005-06 because of municipalities' budget problems, rose slightly. The regional government and local health units contributed to the increase.
The contribution of municipal governments to the growth of the regional economy through new investment was smaller than in recent years. Up to 2006 municipal governments' room for manoeuvre had been limited by the freeze on municipal personal income tax surcharge rates and by the contraction in current transfers of central government tax revenue, still largely based on the historical expenditure criterion, as well as by the constraints imposed by the domestic stability pact. Receipts from the main municipal taxes rose more rapidly in 2007, while transfers from the central government fell further.
Local government debt in Veneto diminished in 2007, contrary to the trend in the rest of the country. In the previous two years it had expanded considerably, in particular through bond issues on the international markets.
