During 2008 the financial turmoil that had arisen the previous summer in a relatively small segment of the US mortgage market spread to financial markets throughout the world and, from the fourth quarter onwards, to the real economy, ushering in the deepest global recession in decades. Italy was the only major euro-area country to register a year-on-year decline in GDP already in 2008. Activity continued to contract sharply in the first quarter of 2009.
In Lombardy, output is estimated by Prometeia to have declined by 0.9 per cent (against growth of 1.7 per cent in 2007). The abrupt drop in orders and world trade in the winter of 2008-09 accentuated the cyclical decline already under way in the region's industry, which reacted by curtailing investment and employment, in line with developments at national level; the capacity utilization rate fell to historically low levels. Value added diminished by 3.2 per cent on average for the year; the qualitative indicators fell suddenly and in the first few months of 2009 reached lower levels than those seen in previous recessions. In the construction sector, the value of production was sustained by the good performance of the public works segment, which was stimulated by the opening of major construction sites, while cyclical conditions in the property market weakened. In services, value added essentially stagnated, edging upwards by 0.3 per cent.
The crisis hit the Italian economy in a particularly delicate phase of deep structural transformation undertaken by firms in response to the changes in the world economy in the past ten years. In Lombardy, the crisis overtook a productive system that was in the process of strengthening itself and abruptly ended the recovery that had gained pace from 2006 onwards following a decade of limited growth.
The rate of growth in GDP and output per worker in Lombardy had been modest up to 2006 both by historical standards and by comparison with the European regions with similar economic characteristics and fields of product specialization, vis-à-vis which Lombardy has long suffered from a delay of investment in research and human capital. The recovery of productivity and the acceleration in activity in the two years 2006-07 were accompanied by a reorganization of the productive system directed mainly towards strengthening innovation, improving the range of products and diversifying industry's outlet markets.
Starting from last October, the abrupt fall in world demand had strong repercussions on the region's economy. Precisely because of its specialization (28 per cent of the region's value added originates from industry) and openness to foreign trade, Lombardy proved particularly vulnerable. Industrial turnover fell by nearly 20 per cent; firms are trying to cope with situation by curbing production costs (72 per cent of respondent firms) and reducing their margins (45 per cent), but nearly 30 per cent are attempting to enter new markets or to improve the quality of their products, continuing the strategies undertaken in recent years. With the cyclical downturn, 45 per cent of firms have encountered a tightening of borrowing conditions, which they have responded to by seeking to contain operating costs (staff costs first and foremost) and revising down their investment plans.
In the last quarter of the year employment was flat, ending a long expansionary cycle; it held up thanks to the contribution of foreign workers, especially as a result of the completion of bureaucratic procedures for entering citizens of the new EU member countries in the civil registry. Recourse to the wage supplementation fund jumped to historically high levels, with a further sharp acceleration in the first few months of 2009. The long downtrend in the unemployment rate came to an end, and unemployment rose to an average of 3.7 per cent in 2008, which was nonetheless well below the national average. Lombardy confirmed its ability to attract foreign workers. More than a quarter of all immigrants in Italy live in the region and they make up more than 8 per cent of its population. The immigrants have a higher activity rate and are younger and less educated than the native-born labour force, with which they have complementary characteristics.
The international financial crisis swiftly altered the setting in which financial intermediaries were operating. In the final part of the year the difficulties encountered by banks, especially larger ones, were set in a context of an economic downturn already under way. The outcome was a steep drop in the rate of growth in bank lending to firms and households resident in Lombardy.
Defaults and instances of loan repayment difficulty increased. The proportion of regional firms that made a loss in 2008 rose to almost a quarter. According to Company Account Data Service and Cerved data, the proportion of firms showing indicators of financial fragility had already increased on the eve of the crisis, in the two years 2006-07, after three years of improvement.
Private equity transactions involving firms in Lombardy fell in value but nonetheless increased in number, contrary to the trend in the main advanced economies. In particular, there was an increase in early-stage investments.
The slowdown in lending to Lombard firms reflected both demand and supply-side factors. According to a survey of the region's leading banks, uncertainty about the economic outlook and the duration of the recession slashed the demand for the financing of capital spending projects. By contrast, there was an increase in the demand for loans to cover working capital and debt restructuring operations. Banks were more cautious in granting loans. The margins applied to loans increased, especially for riskier firms, and loan approval standards became more stringent. Banks' survey responses indicated that this was primarily due to the deterioration in the macroeconomic situation and the increase in credit risk. The reduction in liquidity and banks' capital constraints were lesser factors.
The trend in lending to households mirrored the property-market downturn and the reduction in spending on durable consumer goods. New loans for house purchases diminished, while the growth in consumer credit slowed significantly. Though reflecting a somewhat greater degree of caution, Lombard banks' supply of credit to households did not change substantially. The average characteristics (maturity, loan-to-value ratio, and ratio of the instalment to household income) were in line with those found by surveys in the previous years.
On the funding side, the financial market turmoil spurred a shift of funds towards instruments issued by banks or having a lower level of risk. The outflows of resources from investment funds and other asset management products increased further.
The last few years have seen the spread of cashless payment instruments and electronic banking services. Nearly two thirds of the region's households have a home banking contract. Despite the technological innovations that have accompanied the structural transformation of the banking system, geographical proximity between banks and firms remains an important factor in customer relations. Credit markets in the region have retained a local flavour: three quarters of credit relationships are by way of a bank branch situated in the province where the customer firm has its headquarters; this proportion has risen slightly in the past ten years as a result of the growth in the local branch network. Firms' relations with their reference bank have intensified; the role of the main bank has increased for firms that have relationships with a multiplicity of banks; there has been a moderate reduction in multi-bank borrowing, which historically characterizes firms' credit dealings.
