In 2009 the economy of the region felt the full blast of the recession that began in the last quarter of 2008. Activity fell in all sectors for the year as a whole; the contraction, particularly severe in the first six months, appears to have ended in the second half.
According to Prometeia estimates, after declining by about 1 per cent in 2008, output in Lombardy fell in 2009 by 5.3 per cent, more than the national average. This was the steepest drop in regional GDP on record, exceeding the decline of 4.2 per cent recorded in 1975 after the first oil crisis and far more severe than the recession that followed the turbulence of the lira, which saw activity in the region contract by 0.2 per cent in 1992 and 1.3 per cent in 1993. Recent qualitative indicators signal a revival of activity in the first few months of 2010: firms' assessments of the trend of orders and production improved.
Industry bore the brunt of the effects of last year's contraction in world trade, the largest since the middle of the last century. Lombardy's exports diminished by a fifth, value added fell by 14.3 per cent, investment ceased, and the plant capacity utilization rate fell to historically very low levels, reaching the low for the decade; the loss of jobs was curbed by ample use of wage supplementation. In construction, work on the main projects proceeded as planned, but new public procurement tenders offered less stimulus to activity, while in the property market the cycle continued to worsen. In services, the contraction in value added was more moderate (-2.1 per cent). Air transport suffered more than other services, owing to a combination of cyclical and structural developments at Malpensa, which, though still Italy's second-ranking airport, declined in importance on a European scale after its reorganization.
Owing to regional economy's productive specialization (28.5 per cent of value added originates from industry) and international openness, the immediate effects of the crisis fell more heavily on firms in Lombardy than in Italy as a whole. The recession hit the economy of Lombardy at a time when the manufacturing sector had not completed the gradual transformation, begun in the opening years of the century in response to the changing competitive environment and the spread of a new technological paradigm, which had led to the upturn in activity and productivity in the two years before the crisis. Changes in corporate strategies, in the form of improvements to the range of products, the search for new markets and investment in brands, involved more than 60 per cent of firms, one of the highest proportions in Italy. The same firms were affected by the crisis severely but less so than the others, and their prospects for recovery appear to be more favourable.
Compared with 2007, the year before the crisis, last year firms sustained widespread reductions in profit margins and increases in production costs. The recession had a significant impact on the regional subcontracting system: firms reacted to the decline in demand by re-internalizing production that they had outsourced. Nevertheless, in the two years of the crisis Lombardy's manufacturing firms did not cease to modify the type and quality of their product range and to seek new forms of internationalization, but they did not accomplish the leap in size needed to exploit economies of scale.
The expansion of employment that had lasted since the mid-1990s halted at the end of 2008. The number of persons employed fell by 1.2 per cent overall; the decline was steepest among self-employed persons, employees on fixed-term contracts, workers with less education and, above all, younger workers. By contrast, employment among non-Italians expanded again, reflecting the increase in the registered immigrant population. The fall in labour demand was cushioned by the exceptional expansion in recourse to the Wage Supplementation Fund, which increased nearly sixfold on average for the year and continued to rise in the first few months of 2010. Recourse to the Fund involved an estimated 145,000 workers in industry. Nevertheless, the average annual unemployment rate rose from 3.7 to 5.4 per cent, with an especially large increase in the fourth quarter. A broader measure of the imbalance between demand and supply in the labour market, counting workers on wage supplementation as well as the unemployed, would be nearly one and a half points higher than the official unemployment rate.
The activity of financial intermediaries in 2009 reflected the effects of the financial crisis and the rapid deterioration in the economy. The credit aggregates slowed sharply and, in the case of firms, showed the largest declines in two decades. For manufacturing firms, in particular, the drop was more dramatic than the credit crunch during the recession of the early 1990s.
The crisis also had major repercussions on private equity firms, which reduced both the number and the volume of their investments in the region.
Lending to households grew much more slowly than in the past. New loans for house purchases fell owing to the weakness of the property cycle, while consumer credit decelerated.
According to the Bank of Italy's survey of a significant sample of banks operating in Lombardy, the pace of lending reflected the reduction in demand, especially for loans to finance business investment and households' house purchases. On the other hand, banks tightened their supply conditions between the end of 2008, at the height of the international financial crisis, and the first half of 2009, the deepest phase of the recession. During the second half of 2009 and in the first few months of 2010, the tightening of lending standards appears to have come to an end. Banks continue to display caution in lending, reflected particularly in wider spreads on riskier positions and more systematic demands for collateral, in connection with the perception of risks deriving from current economic conditions.
The survey of firms that the Bank of Italy conducted between March and April of this year confirmed that the credit restriction abated in the opening part of 2010: 21 per cent of the sample in Lombardy reported a tightening of credit conditions, compared with 39 per cent in October 2009 and 44 per cent in April last year. On the basis of our analysis of firms' financial reports, the companies that said they had encountered difficulty in obtaining loans (or that would have liked to increase their bank debt) had a much less solid economic and financial situation already in 2008 compared with those that did not report restriction of their access to credit. Studies of the reports filed with the Central Credit Register also show that the contraction in lending was correlated with firms' riskiness.
Access to credit may have been facilitated by collective loan guarantee consortia. Those present in Lombardy granted guarantees mainly to firms based in the region; two thirds of their activity involved very small businesses with fewer than five workers.
Loan quality deteriorated. There was a rapid increase in new bad debts and an even larger one in substandard loans. Thanks in part to the agreement among the Ministry for the Economy and Finance, the Italian Banking Association and the associations of firms (the so-called moratorium), banks intervened by restructuring the positions of firms in distress. On the basis of the Bank of Italy's survey, one firm out of six undertook initiatives towards debt restructuring, and one out of nine obtained the revision of conditions. According to the monitoring conducted by the Italian Banking Association, at the end of March 2010 about one quarter of the loans suspended under the moratorium were to small and medium-sized enterprises of the region. Even so, the crisis hit the region's firms hard: the number of bankruptcies rose significantly, more sharply than both the national average and the average for the regions of the North West.
Regarding households' financial assets, the growth in bank deposits and purchases of government securities slowed, while holdings of bonds (both bank and non-bank) and shares rose. After the reductions recorded between 2008 and 2009, firms' bank deposits returned to growth in the last quarter of the year and continued to expand in the first few months of 2010. Contacts between banks and customers increasingly take place electronically. At the end of 2009 more than 70 per cent of households in Lombardy had Internet banking access and some half of the firms operating in the region had corporate banking relationships. The number of bank branches in Lombardy fell slightly, but existing branches were located in more municipalities.
