Italy was the only large euro-area country to record a fall in GDP for the year 2008. In the fourth quarter, with the worsening of the financial crisis, the global economy entered the deepest recession since the Second World War, and economic activity continued to contract sharply in the first quarter of 2009.
In Italy, the abrupt fall in orders during the winter of 2008-2009 hit industry first, resulting in a sudden contraction of the demand for labour (in terms of man/hours) and a blockage of investment plans. Then household consumption gradually began to diminish, despite the subsidence of consumer price inflation. Employment began to fall after a protracted period of growth; recourse to the Wage Supplementation Fund soared to historically high levels.
At the outbreak of the crisis the economy of the Veneto region, like that of the Centre and North generally, was structurally sounder but nevertheless exposed to uncertainty and the risk of falling foreign demand. Manufacturing was affected most strongly, in particular producers of intermediate and capital goods. The situation was especially serious for sub-contractors, in particular suppliers of parts for the international transport equipment industry. In the traditional Italian export industries, the slowdown in activity had begun in early 2008, so the fall in orders came as less of a surprise.
Industrial firms, which for years had been engaged in a process of restructuring to improve their international competitiveness, responded mainly by curbing production costs. The drastic deterioration in the international economy following the failure of Lehman Brothers did not affect investment plans for 2008, which were down from 2007 in any case, but it did result in significant cutbacks for 2009.
A special monographic chapter in this year's report goes into some of the structural problems of industry in the region. First it shows that the region's export product specialization, still tilted towards low-value-added traditional goods, has played a role in the diminution in international market shares. The chapter goes on to set out initial statistical evidence of the impact of company restructuring, which has resulted in the stability and in some cases growth of employment in the larger firms. The switch to a strategy of reinforced innovation and strengthening the brand image on international markets, among other things by the creation of permanent distribution networks, necessitated larger firms that could amortize the investment required. The global economic crisis appears to have undercut the investment in these strategies.
The fall in output levels combined with the aim of maintaining the number of persons employed, at least temporarily, resulted in the rapid rise in use of social buffers. The employment impact was limited in 2008, but the sharp increase in company crises in the first few months of 2009 and the danger that the cyclical recovery may not come soon could produce a further deterioration in the job market, with repercussions on household demand.
The impact of the world crisis on the service sector has been moderate so far. Only the segments most directly connected with industry have been affected, such as transport, and those in which foreign demand is most important, such as tourism. Trade has suffered from the fall in household confidence, with a decline in sales of non-food goods in the last part of 2008.
The uncertainty over job prospects and the rise in the average cost of debt in 2008 had adverse effects on the residential real estate market. The growth of the construction industry was hampered not only by the reduction in housing investment but also by the contraction in public works, especially those commissioned by local governments.
The economic and financial condition of firms worsened, especially in industry. With the decline in sales and profits, self-financing also diminished, and the time needed to collect business payables lengthened. Firms' demand for credit waned progressively, and towards the end of the year it was directed almost exclusively to the short-term funds needed to ease liquidity strains.
Financial crisis and recession not only weakened the demand for credit, they also made lenders more selective. The likelihood of increasing borrower risk, higher costs of funding and liquidity strains led banks to widen their spreads, especially vis-à-vis higher-risk firms, and raise the minimum credit rating needed to qualify for loans. The growth of bank lending slowed progressively, most notably that of the larger banks. Credit risk increased moderately.
One chapter describes the structural evolution of the regional credit market. The concentration of banks and the spread of branch networks favoured an attenuation of multiple banking and shortened the geographical distance between banks and firms. The share of the regional loan market held by local banks has increased significantly in the past decade, owing in part to the acquisition of new customers.
The section on local public finances has a chapter on the impact on municipalities of the financial constraints imposed by national budgetary policies, including the Domestic Stability Pact. As a result, investment, which has been falling since 2004, contracted further. On the revenue side, the abolition of the municipal property tax on primary residences and the recent suspension of municipalities' power to modify the income surtax rate would appear to conflict with the aim of achieving a budget discipline based on the correlation between revenue and expenditure - precisely the logic of fiscal decentralization.
