With the worsening of the crisis, since the fourth quarter of 2008 the international economy has been in the deepest recession in decades. The crisis caught the Italian economy in a phase of structural transformation: Italy was the only large euro-area country to record an annual decline in GDP already last year. Economic activity continued to contract very sharply in the first part of 2009.
The abrupt drop in orders and world trade in the closing months of 2008 had major consequences in Piedmont, owing to the region's openness to international trade and its specialization in capital goods and motor vehicles, sectors most severely affected by the crisis. In the first nine months of the year exports had slowed but still continued to grow in real as well as nominal terms, led by motor vehicles and mechanical machinery and equipment, but in the fourth quarter they collapsed in all the region's main sectors of specialization. Domestic orders were affected by the retrenchment of business investment and the weakness of consumption. Industrial production, whose pace had already begun to slow in 2007, contracted last year, with an abrupt drop in the last quarter; the capacity utilization rate fell to exceptionally low levels in the final part of the year. The reduction in activity was accompanied by a widespread worsening in the terms of collection of accounts receivable and in firms' liquidity.
The cyclical situation worsened further last year in the construction sector, partly because of the weakening of the real-estate market, where the number of transactions fell and prices slowed down sharply.
Labour market conditions worsened particularly in industry; this was seen above all in the surge in recourse to the wage supplementation fund from the autumn onwards and the non-renewal of expiring fixed-term employment contracts. The unemployment rate rose significantly in the second half. Household consumption is estimated to have contracted in 2008 in real terms. The decline in economic activity affected road haulage, which saw a collapse in volume in the fourth quarter.
The worsening of the real economy went together with a weakening of firms' demand for credit, owing to the decline in current activity and in investment at the majority of businesses, and a more cautious lending stance by the banks, partly in connection with the signs of a moderate deterioration in loan quality. This gave rise to a slowdown in bank lending to firms in all the main sectors of economic activity; the slowdown was more pronounced for small enterprises and for larger banks. A small contraction in total credit lines granted was accompanied by a generalized increase in the percentage drawn, more marked for credit lines not involving large amounts, and a slight increase in breaches of overdraft ceilings, indicating more stringent liquidity constraints. The growth in lending to households, which had begun to ease in the second half of 2007, fell further. The interest rates on new medium and long-term loans turned downwards in the last quarter, adjusting to the reduction in monetary policy rates; the rates on short-term loans overall began to come down in the first quarter of 2009.
Currently available estimates indicate that in 2008 Piedmont's GDP declined at rates close to the national average; in 2007 it had expanded by 1.1 per cent, according to Istat data. In the first three months of 2009 the cyclical situation worsened: demand continued to fall, depressing production and the capacity utilization rate. Bank lending to firms and households slowed further. The sample of companies interviewed by the Bank of Italy expected orders to continue to diminish over the next six months, though not as rapidly as in recent months.
The profitability of industrial firms, which had slumped in the opening years of this decade and then partially recovered in 2006-07, turned worse in 2008: according to the Bank of Italy's survey, there was a widespread decrease in unit margins; the share of companies that showed a loss for the financial year rose significantly. An examination in depth of manufacturing firms' financial statements through 2007 sheds light on other factors of weakness in the face of the crisis that began last year. While firms' self-financing capacity had fallen to low values compared with the past, their leverage began to grow again in 2006, although it remained below the levels of the start of the decade. The crisis could have an especially powerful impact on firms whose financial situation is structurally fragile, particularly small enterprises. The period 2001-07 saw an increase in the disparities of economic and financial conditions across firms and also within each sector, indicating firms' differing ability to respond to the challenges of the competitive context.
In the early years of this decade Piedmont's economic performance was disappointing by comparison with European regions with a similar economic and productive structure, where potential competitors are likely to be located. A study by the Bank of Italy, based on Eurostat data, about the evolution of Piedmont's technological specialization and innovative capacity compared with that set of regions shows that between 1995 and the middle of this decade Piedmont's traditional specialization in medium and high-tech branches of manufacturing weakened relatively, that research activity remained above the average for the benchmark group of regions but increased only modestly, less than in the benchmark group, and that human capital endowment remained low.
Between 1995 and 2007 the per capita real wealth of households in Piedmont grew less than the national average owing to the lower rate of increase in the market prices of houses, the principal component of such wealth. In 2008 Piedmont ranked eleventh among Italian regions in terms of house prices per square metre, with a value some 15 per cent below the national average.
During the 1990s deregulation and technological innovation sparked a far-reaching transformation of the financial sector, which also had significant effects on bank-firm lending relationships. A study conducted by the Bank of Italy on firms' financial statements and Central Credit Register data shows that the share of debt contracted with large banks fell considerably in the period 1997-2007, in line with the national average; the share contracted with smaller banks rose, especially for small firms, making for a more symmetrical relationship between the size of lenders and borrowers. In the same period signs emerged of a rationalization of customer relationships between the banking system and firms, with an increase in the share of bank loans disbursed by a single intermediary, a reduction in the average number of lending banks and, in the case of borrowing from more than one bank, in the number of outstanding relationships. The reduction in multiple bank borrowing was accompanied by an increase in the share of credit granted by firms' main bank.
In the three years 2005-07 the budgetary action of the region's municipalities continued to be affected by the constraints imposed by national budgetary policy, not least through the domestic stability pact. On the spending side, the impact of these constraints was greatest on municipal capital expenditure, whose significant decrease was also due to the lapsing of the stimulus provided by the 2006 Winter Olympics in Turin. On the revenue side, the expansionary effect of the greater leeway deriving from the ending in 2007 of the suspension of municipalities' right to increase the rate of surtax on personal income tax was countered by a further decrease in transfers of tax revenue from the central government. The exclusion of primary residences from municipal property tax in 2008 involved a loss of income that has only been partially compensated for so far by transfers from the central government.
