Overall the Italian economy stagnated in 2005. GDP fell by 0.1 per cent in the Centre and 0.2 per cent in the North-West and South and Islands; it rose by 0.4 per cent in the North-East.
In the North-West the performance both of industry (with a contraction of 1.9 per cent) and of services (an expansion of 0.7 per cent) was slightly worse than in the rest of the country. In the North-East growth was led by services, whose value added gained 1.3 per cent, while the decline in industry (0.4 per cent) was more modest than in the other parts of Italy, thanks above all to the good performance of machinery and mechanical equipment manufacture. In the Centre the positive contribution of construction was not enough to offset the decline in the other industrial sectors, reflecting above all the difficulties of traditional manufacturing. The result was a contraction of 2.9 per cent for industry as a whole, sharper than in the other areas of the country. In services value added rose at the nationwide rate of 0.8 per cent. In the South and Islands growth came to 0.4 per cent in the service sector, less than in the rest of the country. Despite the strong contribution of construction, industry suffered a contraction of 1.7 per cent, in line with the nationwide average. Agricultural value added declined less sharply than in the rest of the country.
The pace of Italian GDP growth has slowed, since the turn of the century, to an average of scarcely half a percentage point a year, about a third of the euro-area average. On a per capita basis, growth has come to just 0.1 per cent annually. Growth has been particularly anemic in the most advanced parts of the country, the North-West and the North-East. In the southern regions GDP continued to grow slightly faster than in the Centre and North, as it had in the second half of the 1990s, until 2003. In the two years since, the pace of growth in the South and Islands fell below the national average. Over the decade from 1996 through 2005, the average annual rate of per capita GDP growth in the South and Islands was 1.5 per cent. In the Centre and North it was 0.7 per cent, owing in part to significant population growth due to immigration from the South and from abroad. The difference in per capita output between the two parts of the country was reduced, but the ground recouped was slight compared with the size of the gap separating the South and Islands from the rest of Italy (from 44.3 per cent in 1995 to 40.0 per cent in 2005).
Between 1995 and 2003 growth in the regions of Italy was outpaced by that in their European counterparts that were comparably advanced economically. Unlike the other backward European regions, which moved closer to the European average, those of southern Italy fell father behind in terms of per capita output. The Italian regions that had had more than the average European per capita GDP in 1995 had a significantly smaller advantage in 2003, while the distance separating the most advanced regions of Europe from the average had been shortened only marginally.
In the last five years labour productivity has essentially stagnated in the Centre and North and risen only slightly (by 0.4 per cent per year) in the South and Islands. The slowdown with respect to the second half of the 1990s affected most parts of the economy.
In the private service sector, productivity growth since the mid-1990s has been practically nil in Italy as a whole, compared with a gain of 0.7 per cent per year in the euro area and 3.2 per cent in the United States. In many service industries entry barriers and regulatory constraints impede innovation and efficiency, generating rents that heighten costs for firms and damage consumers. In Europe, Italy is one of the countries with the most stringent regulations for all professional services. In retail trade, many regions have enacted measures to limit the expansion of mass outlets. Restrictions on the development of chain stores help to explain the geographical differences in mark-ups and productivity in the retail sector. These are reflected in prices to consumers.
In industry, productivity has fallen in all parts of the country in the past five years, at about the same pace in the South and Islands as in the Centre and North. The changing technological environment and increasing international integration have aggravated the effects. The ability to compete in the advanced sectors is undermined by the small size of firms, which thwarts innovation and the introduction of ICT. In the traditional manufacturing industries the competition of the emerging countries has had particularly severe effects on the industrial districts of the North-East and the Centre specializing in these products and the parts of the South and Islands where similar forms of light industry had developed in the course of the 1990s. The competitive problems have been reflected in a loss of market share for Italian exports.
Between 2000 and 2005 exports of goods at current prices rose by 2.5 per cent per year in the North-West, 2.8 per cent in the North-East, 0.7 per cent in the Centre and 3.5 per cent in the South and Islands. Everywhere, the expansion was slower than that of world trade in goods. An analysis of exports to the 21 leading OECD countries, which take 70 per cent of Italian exports, shows that for all the macroregions except the South and Islands, the loss in market shares between 1996 and 2003 was due mainly to the loss of competitiveness, which was sharpest in the North-West and the Centre. An inability to adapt to the changing geography of world demand has hurt all the areas of the country. The sectoral composition of exports has been especially damaging to the North-East, Tuscany and Marche. Given the difficulty of changing specialty, the firms most successful in meeting the international competition have been those investing in product quality and foreign marketing channels or that have cut costs by internationalizing production, with positive impact also on domestic investment and employment.
In the South and Islands the spread of export industries to new sectors and new geographical areas that had marked the 1990s ceased in the first half of the new decade. Export growth has been concentrated in just a few industries (petrochemicals, basic metals and transport equipment). The number of provinces with significant exports has diminished. The share of the South and Islands in Italian exports of textiles, clothing, footwear and leather, which had gained 0.5 percentage points between 1995 and 2001, fell by 0.6 points thereafter to 7.5 per cent in 2005.
The competitive problems of the Italian regions reflect shortcomings in human capital and in research and development. In the Centre and North, 13.0 per cent of the population aged 25-64 are university-trained; in the South and Islands, 10.7 per cent. In the European Union as a whole, the figure is over 20 per cent. In the regions with the highest per capita output, higher education is scarcely a third as widespread as in regions with similar characteristics in the other countries of Europe. R&D expenditure is 0.4 per cent of GDP in the Centre and North, 0.2 per cent in the South and Islands, compared with 0.9 per cent in the EU. Here too the most advanced regions of Italy – notably Lombardy and Piedmont, which account for a good portion of innovative activity – are far behind their European counterparts. The gap can be attributed to the comparative lack of large corporations in Italy: nearly three quarters of all R&D activity is performed by firms with 500 or more employees.
In 2003 Italian firms had an average of 3.8 workers, against 7.1 in France, 12.2 in Britain and 12.4 in Germany. The gaps were widest in the distribution sector, manufacturing and business services. The impediments to the growth of firms also inhibit the achievement of a sounder, more diversified financial structure that would enable companies to seize the additional opportunities for expansion. The growth of firms and the development of the capital market are mutually reinforcing. Italian firms raise only a sixth of their finance directly in the capital market through share and bond issues, a much smaller portion than in the other industrial countries. Even for the companies of the Centre and North the portion of financial debt consisting in bonds is lower not only than in Britain and America but than the euro-area average. For southern firms, fundraising by bond or share issues is quite marginal.
The reduction in interest rates in connection with membership in the European monetary union enabled Italian firms to lengthen the maturity of their debt and curb the incidence of financial costs on operating profit, keeping this ratio quite low despite poor cyclical conditions (2.4 per cent in the three years from 2002 to 2004, down from 3.7 per cent in the three previous years). For firms in the South and Islands, the ratio of net financial costs to gross operating profit is still 8 percentage points higher than in the rest of the country, owing to poorer profitability and higher debt in proportion to value added.
Notwithstanding the protracted sluggishness of economic activity, the supply of credit remained abundant in all parts of the country. In 2005 unutilized lines of credit increased further. Short-term interest rates on lending to firms remained broadly unchanged for the year. Total bank lending expanded by 8.8 per cent, thanks above all to the longer-term component. The growth of lending was sharpest in the South and Islands, as it had been in the previous two years, with the largest contribution coming from lending to firms. In the past decade, thanks chiefly to intermediaries from the Centre and North, the ratio of lending to fund-raising in the southern regions has risen.
Lending to households increased rapidly in all parts of the country, the growth involving both home mortgages (17.0 per cent) and consumer credit (19.2 per cent). Despite the strong growth of recent years, household credit remains far smaller in Italy than in the rest of Europe in relation to GDP. On a per capita basis household credit in the South and Islands is less than half as much as in the other parts of the country. The difference is accounted for mainly by home mortgages, while consumer credit is more evenly distributed.
New bad debts in 2005 amounted to 0.9 per cent of total outstanding lending at the start of the year. This write-off rate declined from 1.4 to 1.3 per cent in the South and Islands while remaining unchanged at 0.8 per cent in the Centre and North.
Households’ investment portfolio orientation shifted back towards such higher-risk, higher-yield instruments as shares, investment funds and non-financial corporation bonds. Investment in shares and corporate bonds rose in the Centre and North while falling in the South and Islands. Italian investment funds continued to record negative net fund-raising to the advantage of funds constituted abroad by Italian intermediaries. The overall size of the institutional investor sector remains smaller in Italy than in the other leading industrial countries. At the end of 2004 instruments offered by these intermediaries accounted for 25 per cent of Italian households’ financial assets, compared with a proportion of over 40 per cent in Germany, France and the US and 57 per cent in the UK. Even in the economically and financially advanced parts of Italy institutional investors are less important than in those countries. Their role is especially small in the South and Islands; that area accounts for only one sixth of the nationwide total of life insurance premiums, and the ratio of investment fund and portfolio management service assets to direct and indirect bank fund-raising is 40 per cent lower than in the Centre and North.
The gap with other countries reflects not only the more limited presence of insurance policies but also the underdevelopment of pension funds. OECD statistics put pension fund assets in Italy at just 2.6 per cent of GDP. The gap is widest with respect to Britain and America. At the end of 2005 newly instituted pension funds had 1.6 million members. The number of members in proportion to total employment was about half as much in the South and Islands as in the Centre and North.
Bank and postal deposits and government securities continue to weigh heavily on Italian households’ financial portfolios, especially in the South and Islands. In 2004 these assets accounted for 80 per cent of total financial investment in the South and Islands, compared with 60 per cent in the Centre and North. The southern regions also lag behind in the use of banking services, especially in the field of payment instruments.
In 2005 bank fund-raising from residents increased by 4.7 per cent. Deposit growth accelerated to 6.9 per cent, while net bond subscriptions by residents contracted slightly; Italian banks’ recourse to the Euromarket increased. Bonds represent a third of banks’ fund-raising in the North, a fourth in the Centre and less than a fifth in the South and Islands, where over 70 per cent consists of savings and current accounts.
