1996 Issue # 10

8/12/2019 1996 Issue # 10

1/23

Issue #10 October 1996 Copyright Princeton Economic Institute all Rights Reserved 214 Carnegie Center, Princeton NJ 08540 609-987-9522 Annual Subscription US$49.95

by Martin A. Armstrong

Market myths are rarely logical andoften contradictory and when youthrow in politics, the end result issheer pandemonium. For somestrange reason, it is widely ob-served that Democratic presidentsproduce bull markets in stocks andRepublican presidents usually usherin bear markets. However, this istrue of ONLY the postwar era andhas little to do with politics or markettrends. The fact is that the businesscycle has simply been closelycorrelated with that of politics overthe past 50 years. That doesntmean that politics is driving thebusiness cycle. Upon closer analy-sis, one quickly finds that spendingincreases and inflation rises alongwith the national debt more sounder Democrats than Republi-cans. Now if we try to correlate thisfact with the market myth that stocksdo bad during inflationary periods ofrising interest rates what you end upwith is total confusion. Obviously,when you examine stock trends andinterest rates you realize that thereis only about a 35% correlation andthat rising interest rates rarely everaffect stock prices until interestrates rise near expectations offuture stock appreciation. Clearly, ifyou are very bullish and expectstock prices to rise by 20%, you arewilling to pay 5% interest. But when

interest rates reach 15%, a sure betbecomes too attractive causingcapital to shift from stocks into fixedincome.

The political questions that aredominating the press thesedays OUTSIDE the UnitedStates often makes onequestion the assumptionthat free press exists withinthe United States. BothEuropean and Asian presscoverage of Bill and Hillaryis overwhelmingly nega-tive compared to domesticpress coverage. In a recentpoll of journalists in Wash-ington, over 90% voted forClinton in 1992. There isclearly a trend in the USmedia to not discuss any-thing controversial and thisis beginning to appear verybiased to the rest of theworld.

On our fall Asian tour thisyear, the number onequestion asked by ourclients was: Why areAmericans voting forClinton? Dont the scan-dals mean anything any-more?

Outside the United Statesone hears only about theAsian drug money beingchanneled into the Clinton

campaign via Ron Browns oldconnections. You hear about BillClinton being a hard drug userbeing the reason behind his refusalto release his medical records. Youhear about the mounting evidence

8/12/2019 1996 Issue # 10

2/23

Providing Economic & Market Analysis Worldwide

likely going to be indicted after theelections. You hear about Medicareplan A going bankrupt in 1997 andthe possibility of Social Securitygoing into deficit. You hear abouthow short-term interest rates havedoubled in the United States underBill Clinton causing nearly 100% ofthis years deficit being purchasedby Japanese. You hear about howover 30% of the entire US nationaldebt is now held by foreigninvestors - the largest percentage inhistory. You hear about the collapseof the Western coalition and howClintons foreign policy has been adisaster.

Indeed, when youstep outside of theUnited States youcannot help butnotice that thereare two completelydifferent worlds asfar as the media isconcerned. TheNew York Timesruns a story tellingthat Bill Clinton hassevere allergieswhich forces him touse nasal spray 4or 5 times a day.Outside the US thatstory is told thatClinton was at leastin the past a co-caine user whoburnt out is nasalpassages and nowrequires nasalspray applicationsthroughout the day.

On October 21st,the Wall StreetJournal publishedan article HalePredicts Hillary In-dictment. The storygoes on to say Asa cooperating wit-ness, inmate Halespent hundreds ofhours with federalinvestigators, andknows more abouttheir evidence thananyone not boundto silence. If youdo dig deep in theAmerican press youwill find the samestories. But theyare far from thefront pages andcertainly never dis-

cussed by ABC, NBC, CBS or CNN.This is perhaps one of the reasonsbehind the latest battle for the airwaves between Murdochs FoxNews and CNN. Murdoch has beenlaunching Fox News Channel -commenting on the need to offsetthe filtered liberal news Americansget to hear.

When we look at the stock marketwe do see that while the correlationbetween it and interest rates isalmost non-existent, the one rela-tionships that is higher than 90% isthe Dow Jones Industrials and thedollar. While the US national debthas reached record highs in foreign

ownership, so have US equities!The trouble that politics nowpresents to the future of the bullmarket is not an issue of politicalbias, but one of foreign confidencewhich if lost, spells disaster!

It is clear that Clinton will most likelywin. This is something our computer

models have been predicting forseveral years. We have alsowarned that Clinton could be thelast Democratic president ever to beelected.

8/12/2019 1996 Issue # 10

3/23

Copyright 1996 PEI All Rights Reserved

by Bruce Allen

The Euro (the European singlecurrency) and who is in and who isout has been shaping up as thesingle biggest issue to confrontEurope for many years and iscertainly the most divisive. At stakeis the future economic structure ofEurope and the degree to how farpolitical integration can be pushedbefore cultural & ethnic differencesinevitably re-assert themselves. Atstake as well, is the reputations andegos of many European leaders. Asignificant political campaign isbeing waged to convince the worldthat the first phase of the singlecurrency will be in place fromJanuary 1999. From this point, theEuro will exist on the balancesheets of the central banks.National currencies will remain incirculation at an exchange rateirrevocably locked to the Euro untilreplaced by Euro notes and coins in2002. In a recent survey 80% of theeconomists interviewed agreed thatthe European Monetary Union willstart on time. No-one imagined itwould not happen. Germany,France, Belgium, Holland, Luxem-bourg, Austria and Ireland are theleading contenders to qualify at theoutset although currently onlyLuxembourg has met the criteria set

out in the Maastricht treaty. Italy,Spain, Portugal and Finland haveset their sights on qualifying in thefirst wave as a matter of nationalpride. Sweden has adopted a wait-and-see policy while Britain andDenmark have an opt-out. Greeceis unlikely to approach qualificationduring this period.

The Maastricht treaty

Maastricht represents a milestonein the history of the European Unionwhich started as a free trade zone in1957. It set the criteria a state mustreach to take part in monetary union- government debt must be below60% of Gross Domestic Product,the budget deficit must be below3% of GDP, interest rates andinflation rates must converge to bewithin a small band of the strongeststates and the foreign exchangerate must be stable for a periodbefore joining. No matter in whichofficial language of the EU youchoose to study the thousands of

words of the treaty, it lends itself tointerpretation and nearly all Euro-pean countries will need imagina-tive accounting to qualify on time.As we mentioned in an earlier issue,it does not consider unfunded socialsecurity liabilities which, if includedwould blow all the core countries outof the water! This is a politicallydriven scheme. It is not anevolutionary scheme coming to-gether under market forces formutual benefit. As such it has manyeconomic dangers for some coun-tries not apparent in others. It alsohas economic and social benefitsbut again these are not of an evennature in all states. Luxembourg isthe nearest thing to Cinderella witha variety of - we should not say ugly- sisters squeezing their feet into

the glass slipper.

Germany

Chancellor Kohl is the champion ofmonetary union. He clearly wishesto be remembered as the foundingfather of a united Europe to matchany other super power of the future.A single currency bloc and byimplication, a boosted economy isseen as helping the re-unification of

Germany. Capital flows from theWest to the East of Germany havebeen on a scale far larger thanforeseen and will need to continuefor some time. Kohl has also impliedhe sees a Europe tied togethereconomically as the best defenseagainst the possibility of warbetween European states. Somemight argue forcing states togetherin this way would lead to increasingtension at least during a period ofadjustment, but such voices areseen as being against the tide ofsentiment. The Bundesbank backsKohl up in that it has alwaysmaintained monetary union withoutpolitical union is doomed to fail.However, Kohl also knows that theelectorate will accept a NorthernEuropean (Deutschemark) bloc plusFrance in political and monetaryunion. The Club Med countriesare not really acceptable.

This year Germany is likely to comein with a budget deficit nearer 4% ofGDP rather than 3%. Government

forecasts show the target being metin time due to tax restructuring,paring back government expendi-ture and assuming an increase inthe economys growth. Privateforecasts are not so optimistic.Ironically, Germans are perhaps themost socialist in Europe in theirattitude to government. It will not beeasy to cut back expenditure andmost attention is on re-structuring ofthe complicated tax system. Webelieve this is only likely toencourage further capital flows outof Germany.

In Germany itself, monetary union isnot such an emotional debate as inBritain for example. Most peopleregard it merely as a re-naming ofthe Deutschemark. Nothing is beinggiven up. Perhaps an example ofthis almost lack of interest was thecriticism of the Association ofGerman ConsumerGroups on thegovernments advertising campaignto promote the Euro. The brochureswere described as long-winded,amounting to little more than amountain of barely intelligibletheory.

France

The Franc Fort policy of Francehas more than once this century ledFrance into economic difficulties.Today is no exception. FinanceMinister Jean Arthuis is publiclyconfident he is on course to steerthe country into monetary union.The goal is to maintain the nationalstrength of the currency and bylocking other competing nationswithin Europe into fixed exchangerates, to protect French industryfrom depreciating imports. Francehas a history of instigating tariff

protection from outside productsand this philosophy no doubt will beproposed within an Euro Fort. TheFrench view from the deal struckbetween Kohl and Mitterand overfive years ago supports the idea of aunited Europe based on Germanyand France, with Germans lookingafter economic policy and theFrench running the foreign policy.

The need to qualify for monetaryunion is the excuse to propose

The EMU Bubble, When will it Burst?

8/12/2019 1996 Issue # 10

4/23


savage cuts to government spend-ing on social security. In turn this isbeing fiercely resisted by theindustrial and more particularlypublic service unions. A package oftax cuts announced in Septembertop stimulate spending is seen bymany as too complicated to havemuch effect on consumer confi-dence and offset by other in-creases. Arthuis refuses to discussthe possibility that France might notachieve the criteria. Amongst thetricks he has up his sleeve is the FFr37.5 billion transfer in pension fundassets from France Telecom toreduce the deficit.

Despite the best neutral estimatesthat France will not be in a positionto achieve the Maastricht criteria,we can assume that the books willbe fudged to ensure they are met. Acomment worth reporting fromArthuis - We were late in realisingthat high public spending riskedstifling the economy and destroyingthe potential for creating jobs.Whether the French will give uptheir right for their children to haveskiing lessons paid for by the stateis yet to be seen!

Belgium

Without the EEC Brussels would bea ghost town is the cynical view ofmany expatriates living in theBelgium capital. There is no doubtthe European Union is a majorarticle of faith particularly in view ofthe traditional split between theWallonian South and Flemish Northsections. Being part of a largerEuropean nation provides somerelief from the cultural dichotomy.Belgium has the highest debt inEurope at 133.8% of GDP but ispursuing a first wave seat inmonetary union. Remember thetarget is 60%. How can this beachieved.? For many years theBelgium government had a nice linein borrowing Marks and SwissFrancs at a preferential low rate andbuying higher yielding SwedishKronor, British Pound and FrenchFranc debt. Since 1992 this profithas turned into a paper loss of $1.1billion following the devaluations.Undeterred they have resorted toselling gold. Some 300 tons lastyear realising a profit of $7.6 billionin windfall profit on a market to bookbasis. Even so the public budget

deficit was 4.5% of GDP last year.

[Note that Germany remains firmlyagainst bullion sales believing thatgold should be retained in reservesto support the Euro in future.]

The Prime Minister Jean-LucDehaene has taken special powers

to draw up the 1997 budget withoutparliamentary consent. Unpopularsocial cuts are proposed as well taxincreases to reduce the deficit to3%. A forecast reduction in theoverall debt of 10% of GDP issufficient decline, in Belgiums view,to warrant inclusion on the basisthat it is going in the right direction.Other analysis suggests that itmight be sometime towards the endof the 21st century before Belgiumachieves the 60% target. Again, likeFrance, social unrest is evident andwill increase as the cuts in state

funding is put in place. As oneBelgium economist said We haveto do what we can within the limits ofour own culture. How true.

Luxembourg

The Grand Duchy easily qualifieswith a public debt of only 6.2% ofGDP (a tenth of the maximum levelallowed) and a budget surplus of0.7% of GDP. Inflation is around the

2% . Monetary union (with Belgium)is already 75 years old., the majorityof exports and imports are within theEU. For Luxembourg, the Euro isalmost a non-issue.

Netherlands

The Dutch have traditionally ap-plied a skeptical view to theEuropean Union but as naturaltraders they are embracing the

project and enjoying a positiverelationship with Germany. Debt asa percentage of GDP was 79% lastyear and falling. The budget deficitwas 3.5 % of GDP . Like Belgiumthe view is that the trend is sufficientto justify their inclusion in the firstwave. Holland has already put inplace structural reforms in industryand social security which is givingtheir economy a realistic chance ofmeeting government targets. LikeBelgium they have been replacing

bullion with interest bearing securi-ties.

Italy

Official growth projections in Italyhave been proved unrealistic as theeconomy verges on recession.

Never-the-less, the Prime Minister,Romano Prodi, stung by Frenchcomments denigrating Italys quali-fication for monetary union in 1999and by Spains Jose Maria Aznarsaggressive program to be in the firstwave, has dropped previous plansfor a later entry. The governmentwill implement an austerity packageto cut the budget deficit to 3% by theend of 1997 instead of the previous4.5% target. Whether his centre leftOlive Tree alliance will holdsufficiently for parliament to passsuch a budget is yet to be seen.Mario Monti, EU commissioner forfinancial affairs, commented ashort recession is an acceptableprice for Italy to pay for monetaryunion.

Spain

Monetary union has become themajor policy objective of Aznarsminority centre-right government.While many remain skeptical thatMaastricht criteria can be met intime, Spain feels that on the basis ofa roughly equal economic perfor-mance with France, it should not beexcluded. The benefits are seen asproviding a boost to the economy,lower inflation and interest ratesand higher employment within azone of stability. There is also theissue of political status. Irrespectiveof successfully joining in the firstwave, it has provided Aznar with the

justification to apply tough eco-nomic policies and proceed rapidlywith a program of privatisation ifstate assets.

Portugal

Recent polling reveals that morethan 80% of the population wantmonetary union. Prime MinisterGuterres socialist government iscommitted to this objective and ontheir own projections will achieveMaastricht criteria without raisingtaxes or cutting social spending intheir latest budget. The benefits areseen as allowing Portugal to offerthe best return on investment interms of labour costs and govern-

8/12/2019 1996 Issue # 10

5/23

8/12/2019 1996 Issue # 10

6/23


nications and transport. Effortsmade by governments to restruc-ture their economies in the face ofincreasing competition have notgone far enough to be effective. TheEUs share of exports to OECDcountries has been falling since1987. Mr Martin Bangemann, indus-try commissioner, suggested eco-nomic and monetary union in 1999would do much to improve competi-tiveness. How this would comeabout was not detailed.

Meanwhile, Cenelec, the Europeanbody that sets electrical standards,has abandoned its proposals toproduce a standard Europeanelectrical plug after five years work.The 18 countries involved could notagree on a common design afterobjections on commercial, safetyand technical grounds from variouscountries. Perhaps in the future youwill not have to change yourcurrency as you move throughEurope but dont forget that multi-

adaptor for your laptop powersupply and mobile phone.

Oiling Inflation

As we warned in June this year, oilprices have moved up stronglypushing up UK manufacturers fuel

and raw material costs causing thefirst increase in factory output priceinflation in 14 months. Prices ofpetroleum products rose 3.9%between August and September.Crude oil was up 32% on the samemonth last year. But all is wellaccording to most commentators.Underlying inflation (which ex-cludes such luxuries as oil, petro-leum products, food and drink) roseonly 0.9% year on year, the lowestannual rise since 1967.

Political Gaps

The last annual conferences of themajor political parties before thenext UK general election have beenheld without any dramatic change inthe opinion polls. Labour maintainsa very significant lead with theincreasing optimism on theeconomy, which should improve theruling Conservatives chances, bal-anced by the latest attack on thegovernments handling of inquiriesinto political sleaze, particularlythe cash for questions affair. Ifanything the gap between variouspolls has widened. The Referen-dum Party, campaigning on a singleplatform to let the people decide onEuropean integration and the singlecurrency, will hold their conferencelater this month. They planned foran attendance of 2,000 people buthave had to increase capacity tosatisfy a much higher then expectedresponse.

8/12/2019 1996 Issue # 10

7/23


by Harry Groenert

Much ado about nothing?

Pension payments are not taxed asordinary income in Germany. It isthe current law - virtually no taxpayments on the pension but onlyon a portion of about 30% which isseen as capital income (Interestportion of the pension). The first12,000 of any income is free foreverybody as the living minimum,though pensioners could theoreti-cally earn a tax free pension ofaround DM63.000 for singles andDM110.000 for couples. Theoreti-cally, because there are no pen-sions of this magnitude, however,some of the pensioners get other

income and pay a lower tax ratethan normal working people, be-cause the major portion of thepension is tax-free. This is good forthe pensioners but not so for thefinance minister, Mr Theo Waigel,whose wallet looks quite smallthese days while he is trying to buytickets for the great Euro-Perfor-mance, scheduled for 1998 inMaastricht.

The construction of the pensionformula is in favor of the pensioner.It is the law since 1992 that any

increase in public duties will becompensated by higher pensionpayments which subsequently willincrease the budget. Mr Bluem, theminister for labor and social affairscould not afford this other than byeither increasing the installments orby changing the pension formula. -Both would certainly start a publicdiscussion and not be a help for theelection at all.

Mr Waigel on the other hand isknown for being creative wheneverhe sees a chance for increasing the

tax revenue. The Waigel-Commis-sion came up with the request tocheck the ability to raise taxes onthe pensions. The thought istwofold: Either tax deductible pen-sion contributions or a tax-freepension. The commission is exam-ining the current status and Waigelknows the result already. About70% of the contributions arededucted from the taxable income -he will say, why not tax 70% of thepension then?

The public is quite sensible as far aspensions are concerned. Not anypolitician likes to generate a publichysteria but the seed is spread. Atthe end of the day the governmentwill decide and the only thing theyneed is income. The more thebudget deficit is surging, the morelikely it will become a fact of lifefinally. Just another small nail in thecoffin.

Othello - put money inthy purse.

The German tax reform shallcombine several objectives. One isto reduce the budget deficit, whileanother is to gain votes at the nextelection. Within a democracy the

ruling party needs the agreement ofthe opposition. The SPD controlsthe Bundesrat, the parliamentssecond chamber. This is the reasonwhy Mr Waigel postponed some taxand benefit proposals which hadbeen in the press for some time. Heabandoned the plan to delay anincrease inchildrens allow-ances and he alsostopped the goahead of the modifi-cation of Germanyswealth tax because

it was obvious thatthe SPD would voteagainst it.

The present wealthtax had been de-clared unconstitu-tional in a courtruling last year andwill not be chargedin 1997. The in-crease in thechildrens allowanceis estimated atDM3.5bn a yearand the wealth taxwill cost aboutDM3.9bn a year inlost revenue. MrWaigel is still confi-dent and believeshe can solve theproblem with thedeficit. He admittedthat Germany willthis year exceed the3 per cent limit fordeficit as a propor-tion of gross do-

mestic product and he said: Evenwith no further progress on theabove mentioned tax points, Ger-many would achieve its goal ofbringing the deficit down to 2.5 percent of GDP.

How is he going to solve theproblem? He indicated that therevenue loss could be partly offsetby a reform of the inheritance tax.Just another field with a goodchance to get money. There areabout DM500bn of assets inheritedeach year. The major part of this isreal estate, which is taxed on theEinheitswert, which is less than 10per cent of the real value.

Germany has one of the mostcomplicated tax systems with animmense variety of different taxes.To reform each of these would be ofgreat help for the sluggish economybut the further Mr Waigel goes themore it becomes clear that taxreform is a new word for shifting taxobligations. Well, lets go then andplay musical chairs.

German Update

8/12/2019 1996 Issue # 10

8/23


by Dana Schneider

When the popular GeneralAlexander Lebed (ret.) and head ofthe Security Council was fired, herevealed several very troublingaspects of Russias transition todemocracy and a market basedeconomy. Lebed has only verbal-ized what most Russians haveknown for quite awhile: that corrup-tion is spread through out thegovernment and reaches the high-est levels starving the economy,intensifying domestic tensions, anddestabilizing the military.

Lebeds three months in the Kremlinsent a strong message: Crime andcorruption are sapping the budgetand economy placing an enormousstrain on the population and themilitary. Moreover, the lawlessnessof the emerging market is a majorinterest driving the Kremlins powerstruggles and political instability. Inshort, the issue is not a relentlessdrive to the market but the criticalneed to pause, clean up some of themess, and make what already hasbeen done work. A rational place tostart is law, domestic strife, and 1.5million soldiers with guns.

Lebeds commentary has made nofriends in the Kremlin where bigbanking, natural resource monopo-lies, and various brands of criminal-ity dine together. Alas, the formergeneral of the Afghan war wasaccused of no less than treason,power-grabbing, and mutiny. Thevariables just do not add up sinceeven the most optimistic can notbelieve that the Kremlin has justone rotten apple. Assessing thissituation with a healthy dose ofpolitical reality reveals a theme veryfamiliar to the established democ-racies : The whole bushel is full ofrotten apples and the relativelyedible one got tossed to preservethe quality of the others. Two weekslater, Yeltsin is still issuing publicstatements that the presidentialcampaigning in the Kremlin mustend.

Lebed has questioned thecosts of reform...

Market reforms and privatizationhas knocked over the militaryindustrial complex and left themilitary without funding, futureemployment, and wages. Outputfrom this sector has fallen 75-80%while funding for conversion hasdropped from 67% of set-asidefunds in 1993, 13% in 1994, and abig zero for 1996. At the same time,market forces have left the majorityof citizens priced out of the marketwithout a safety net and owed fourmonths to a year of back wages.After five years of economic reform,

what has emerged to replace theprevious system is not sustainable:funding for the military and socialspending is slated for deep cuts.This is a glutton for social strife thatmany hope that the government hasthe good sense to avoid.

Which move one stepforward and two stepsbackward...

Lebed made sure to point out thatone of the most successful out-growths of Russias economicreforms has been financial crimeand institutional corruption. Appar-ently, the IMF may have grown tiredof the governments corruption.After all, many of the folks in andaround the government have be-come millionaires in a desperateeconomy being subsidized andfunded by the IMF, sovereigngovernments, and multinationalinvestors. The shortfall in thebudget from failure to collect taxesis not really a matter of inefficiency

but more a result of campaignpromises and deal making betweenfederal and regional politicians incoordination with financial andindustrial market makers. For thesecond time since July, the IMF willhold back on $380 million loaninstallment in an effort to force theKremlin to start legislating andenforcing some very basic elementsof law.

With crime and corrup-tion taking big strides....

Estimates have cited tax paymentsat less than 40-60% than budgeted.The governments recent attempt tocollect by publishing a list ofoffenders left off some of thebiggest culprits with the mostobvious links to the government.20% of Russias banks are believedto be controlled by organized crimewhile a number of very largefinancial/industrial conglomeratesare also believed to offer coopera-tion to various degrees. For the thirdtime, bond thefts of $57 mn havebeen reported. And a recent report

from the central bank estimates$60-$80 bn worth of capital hasbeen taken out of the country sincereforms began in 1992. An amazingamount of money has been placedin foreign bank accounts. Whyshould foreign investors put theirmoney in Russia when the Rus-sians are exporting the moneyfaster than you can say embezzle,defraud, bribe, threaten, and laun-der?

Sapping social spendingand stirring tensions...

Recent reports show a profit of 1.7trillion rubles from privatization forthe period of January to August1996 while 2.7 trillion rubles werestolen (misappropriated) withinthe government agencies duringthe same time. This is more than anet loss that over 147 millioncitizens must absorb. Conse-quently, cuts in social spending areproposed as well as in the militarywhere 15% of the staff is slated for

cuts (this may slow down theft ofmilitary funds). The result ofcorruption in government and inmarket reforms has caused drasticcuts in the military which by the wayis still a nuclear superpower.

Alexander Lebeds Heads UpWidespread corruption is destabilizing the military

8/12/2019 1996 Issue # 10

9/23


Splintering territories...

The military and domestic unresttakes on a huge dimension whenautonomous republics or regionalgovernments begin making noise.Several regional governments havedemanded to have a say in theKremlins budget - writing that it will

have serious consequences for theindividual territories and lead to...further curtailment of invest-ments, a catastrophic industrialdecline, social tensions and, ulti-mately, the termination of demo-cratic reform. The recommenda-tion was to refocus the budget toallow more economic developmentof all constituent territories and totheir greater independence andresponsibility. (Interfax)

More and more regional govern-ments are reaching to control their

own territorial concerns: taxcollection, crime enforcement, con-trol and funding of the military andnatural resources as well aseconomic policies. The TatarstanRepublic government has toldMoscow tax collectors that it isbewildered at accusations that akey industry has not paid sufficienttaxes and has rejected the claim.Other Republic governments havetaken the side of the industry withintheir territory to reject Moscows taxdemands and seek negotiationson the matter.

The current gubernatorial cam-paigns play a part in the moneygame. Elections on regional levelshave turned up some opponents toYeltsin, polling postponements, andinvalid results. Valid, however, isAlexander Rutskoi winning thegovernors seat for the KurskRegion. Rutskoi, recall, was theVice President of Russia in 1993when parliament voted to impeachYeltsin - making Rutskoi President.The White House was then seizedbut the coup was unsuccessful.With this in mind, one must wonderif the threat of a military coupwould be incubated within theKremlin or in the far off regions.

Leaving the military indisarray...

The Russian military has over 1.5million servicemen who live indeplorable conditions, receive sel-dom and minuscule wages, andhave no where to go for housing and

employment even if they weredischarged. Army crimes have alsocaused over 5,000 deaths. Deser-tion and suicide rates continue toclimb further deepening low morale.

But providing insufficientand dangerous solu-tions....

In the beginning of October, Yltsincalled for more funds to beimmediately sent to the angryservicemen since salaries have notbeen delivered for months. By theend of the month, nothing had beenresolved. The Defense Minister,Igor Rodionov, stated that Chroniclack of funds is taking the armedforces to the brink of undesirable,and even uncontrollable develop-ments.

The Defense Ministry has proposed

placing 10-12,000 soldiers in aspecial military police force to crackdown on crime within the army.Apparently, this new force willaugment an already integratedmilitary police force that patrolstraffic and maintains order withinand without the civilian and militarypopulation. It probably wont belong before they are sent out toenforce tax laws and collections.Yeltsins chief of staff and nowproxy, Anatoly Chubais, is set tomeet with regional officials todiscuss the enforcement of the

federal constitution and legislation.Lebed traveled to a military baseoutside of Moscow where hepointed out that the commanderresponsible for access to 60% of thenuclear missile capabilities had notbeen paid wages for severalmonths. A director of nuclear armsresearch recently committed sui-cide in Chelyabinsk. These menhave no money, no jobs, nowhere torelocate and little money expectedfrom the Kremlin.

Lebed has shown themost difficult reform is inthe military.

Lebed has shown that a weak,underfunded, and leaderless mili-tary is the primary threat to Russia.Lebed was accused of raising aforce of 50,000 soldiers for a coup.Half right. Lebed did suggestraising a force of 50,000 but to

counteract crime, domestic turmoiland/or breakaway regions thatseems to be brewing across thetime zones.

Lebed also pointed out that thecorruption in the military wasproviding arms to forces that theleadership is currently trying to

suppress, like Chechnya, andplaces that they plan to or would liketo continue to control later. Cer-tainly, holding the Russian Federa-tion together is an objective as wellas exercising influence over theSouthern Republics. But this taskbecomes ever more difficult whencertain members in the militarycommand are enriching and pro-moting themselves through a con-flict that they are unequipped to win.At the same time, engaging in alosing war only demonstrates weak-ness and invites other would-beindependent states to take the risk.

Lebed also sent another messagehome to some of the mostunreceptive ears when he negoti-ated a peace accord with Chechnya.He revealed the prolonged andfailing activities in Chechnya were ameans to create an environmentwhere criminal activities can have abig payoff. Indeed, as alreadydocumented by missing 1995 fundsset aside for Chechnyan warreparations, the war is a means toappropriate funds and weaponsdirectly into ones own pocket.

History has shown that a nation ineconomic turmoil, saddled with an alarge and overbearing military, mustrestructure its forces or meanderdown the road to conflict andwarfare. Lebed did take a giant steptoward making Russia a constitu-tionally bound democratic nation:He saw how unpopular theChechnyan war was with thecitizens and acted to abide by theirvoice and to end the violence; andhe has insisted that the rule of lawmust be established and enforced ifa free market and democracy are tosurvive - particularly in the ranks ofthe military. In this regard,Alexander Lebed had begun torestructure and rebuild the oldSoviet military into a new RussianArmy. It is unfortunate that his workwas cut short.

8/12/2019 1996 Issue # 10

10/23


by Nigel Kirwan

Will New Zealand snatchdefeat from the jaws ofvictory?

After 13 hard and often harsh yearsof economic reform the people ofNew Zealand could be about to turntheir backs on the long awaitedfruits of their sacrifice. From acountry which in 1983 was the mostdebt ridden and over protectedeconomic basket case in thewestern world it is today the worldsmost unprotected trading environ-ment with liberal foreign investmentrules, zero foreign currency de-nominated government debt, lowinflation, low taxes, relatively lowand falling unemployment, andsoaring business investment. How-ever, gone are the principalarchitects of these dramatic changesand in their place stand a mixed bagof populist nationalists, protection-ists and racists in the Maoridominated NZ First Party, aresurgent Labour Party of oldschool big spending intervention-ists, and outright marxists in the farleft Labour breakaway AllianceParty. Together these loonies now

command 67 seats in a 120 seatparliament after the October 12 NZnational election.

The voices of reason in the minoritygoverning National Party and theright wing Labour breakaway ActNZ still maybe have a chance togovern if the often contradictory andbitter rhetoric of the left-wing partiesprevents them from forming aworkable coalition. Neverthelessthe impetus for further reform islargely spent as no minoritygovernment would stand a chance

in implementing any furtherliberalisation or privatisation. It willbe sad not only for the people ofNew Zealand but also from a globalperspective if this one shiningexample of economic resuscitationis not allowed to continue to bloomand express its full potential.

The Liberals honeymooncomes to an embarrass-ing end

Some are beginning to wonderwhether the Liberal Party have losttheir collective senses following aweek where two ministers haveresigned and two other Cabinetmembers are just hanging on totheir political lives. At issue areMinister s declarations ofshareholdings and conflicts ofinterest between shares continuingto be held and the ability someMinisters may have in affecting thefortunes of various companies theyhold shares in. This comes only afortnight after Treasurer PeterCostello broke a diplomatic conven-

tion by briefing the press on thesubstance of his discussions withAlan Greenspan, then denied whathed said only to be confronted witha tape of him doing just that. Theelectorates verdict on these eventswill be delivered in a forth coming bi-election. Some commentators be-lieve, however, that the PrimeMinister will soon have an excuse tosack some embarrassing non-performers and revitalise his teamwith some exciting back-benchtalent.

Employmentgrinds to half inthe Senate

Unemployment hastaken a turn for theworse in Australia withthe main cause being adrop in the growth ofnew jobs and a down-turn in business andconsumer confidence. Itis predictable that theLabor Party and far-leftDemocrats andGreens (Reds!) shouldblame the abolition ofA$2billion worth of train-ing schemes which infact achieved nothingother than to disguisethe real level of unem-ployment. The real cul-prit for the above mal-aise on all fronts is the

continued existence of Laborsunfair dismissal laws covering allfederal industrial awards. Adminis-tered and adjudicated upon byLabor appointed industrial relationscommissioners the repeal of theselaws is being held up in the leftcontrolled Senate.

Recently I had first hand evidenceof the damage these laws havedone to employers and intendedemployees alike. The law actuallyprevents an employer from dismiss-ing an employee without workingthrough a 3 periods of counsellingover 3 months. Example: Myoptometrist hires an optical techni-cian who makes repeated errors infilling prescriptions costing the firmseveral thousand dollars. Only afterdiscovering that the employee isworking under a false name andforged qualification certificate doesthe employer confront him and ispromptly told to get stuffed. Theemployment is terminated with 2weeks full pay plus accrued holidaypay with a 17.5% loading. Theformer employee sues for unfairdismissal, wins and the employeremerges A$17,000 poorer! Storieslike this abound and in a countrywhere small business is the largestemployer is it any wonder thatnobody is hiring and confidence is

hitting rock bottom?

Australasia

8/12/2019 1996 Issue # 10

11/23


by Craig H. Stephen

Hong Kongs new CEO

In Hong Kong only two monthsremain before the appointment ofthe first chief executive of the newpost 1997 Special AdministrativeRegion and so far we have aroundfive contenders. There is little of thebaby kissing and electioneeringknown in the West, as the verdictwill be delivered by a 400 strongSelection Committee rather thanthe Hong Kong population. TheSelection Committee is to bechosen by the Beijing appointedPreparatory Committee next month.Sixty of the 400 selection committeeseats have been set aside for the

Chinas hand-picked deputies to theNational Peoples Congress leav-ing more than 5,000 Hong Kongcitizens volunteering themselvesfor the remaining 360 places. Youdo not have to be unduly cynical tobelieve that the choice of thePreparatory Committee - headed byChinese Vice-premier Qian Quichen- ultimately lies with Beijing.Nonetheless Beijing realizes thatthe chosen candidate will be seenby outsiders as a leading indicatorof whether Hong Kong is going tohave its promised one country two

systems post 1997.Understandably for Hong Kong,most candidates have a high profilebusiness backing. The most recentdeclared candidate is Peter Woo,former chairman and major share-holder of Wharf Holdings. He isprobably seen as the most liberal ofthe candidates and this togetherwith his earlier support of GovernorPattens democratic reforms is likelyto rule him out. The current chiefSecretary of the Hong Kong civilservice, Anson Chan would be thepopular choice, polling a supportlevel of more than 50%. Howevershe is seen as too close to thepresent British administration. In-deed she may not have done herChinese credentials much goodrecently by referring to the disputedDiaoyu Islands as the Senkakus,their Japanese name. A secondbest and more likely scenario mightbe her appointment as a DeputyChief Executive while staying on asthe head of the civil service.

Shipping magnate Tung Chee-hwa,chairman of Container Lines iswidely expected to be the mostlikely choice. While he has singledigit local popular support, thisdoes include Cheung Kong chair-man Mr. Li ka-shing. More importantis his close links with Beijing. He is avice-chairman of the PreparatoryCommittee, while in Hong Kong hewas until recently a member of theGovernments policy making execu-tive council. He also has close linkswith Taiwan which could be helpfulin bridging the gap with Taipei. Twoother outsiders are Chief Justice SirTi Liang Yang and Lo Tak-shingwho is backed by Henderson LandsLee Shau kee, recently ranked theterritorys richest man. Lo is the onlycontender to have publicly re-

nounced his British passport al-though Sir Ti has apparently askedthe British government to take backhis knighthood. However despitethese commendable sacrifices bothremain outside choices.

Senkakus or DiaoyuIslands?

The ongoing feud over the disputedDiaoyu Islands between East Asiastwo giants, China and Japan hasthus far been limited to a flotilla of

Chinese protesters from Taiwanand Hong Kong planting symbolicflags on the rocky outcrop and theloss of one foolhardy Hong Konglegco candidate. The issue sparkedby right wing Japanese activistsrepairing an unmanned lighthousein July, has been fanned byprotesting Taiwanese and HongKong democrats, demonstratingtheir Chinese patriotism. Ironicallyit does not seem so many monthsago that attention was focusing onthe military stand- off betweenChina and Taiwan over the Taiwan-ese straits. Both governments havebeen fairly restrained in theirrhetoric, despite the temptation toplay the nationalist card. Howeverwith a general election this month,Japans Liberal Democratic Partyhas put the claim to the Senkakus inits campaign manifesto. While theissue may be sidelined short-term, itdoes once again highlight toinvestors the underlying fragility ofAsian peaceful coexistence.

In China inflation fell to a four yearlow last month, increasing thelikelihood that we might see thethird consecutive cut in interestrates this year. In September theretail price index - Chinas officialinflation measure fell to 5 per cent,the lowest level since austerity wasintroduced in 1993. With returnsfalling in savings accounts, localinvestors are moving into thecountrys stock markets in a bigway. October 13th saw turnoversoar to a total of HK$21bn on theShanghai and Shenzhen A share(local) exchanges, representingthree times the turnover of HongKong. Hong Kong too is rediscover-ing its heady days of 1994 as dailyaverage turnover has doubled toHK$8bn and new highs are repeat-

edly reached.

China - poor enough forWTO

A recent report on China by theWorld Bank has substantially down-graded the estimated size of theChinese economy. The new figuresreduce previous estimates of thesize of the Chinese economy byover 25%. Also the number of theChinese population living in povertyis closer to a third than the less than

ten percent previously estimated.While the growth rate of theChinese economy remains amongstthe highest in the world, it might stillbe further behind than manythought. For Beijing, these figuresare a double edged sword, whilesome off the gloss might come offthe Chinese economic miracle,Chinas case for gaining entry to theWTO on the less demanding termsof developing nation status is givena boost.

South Koreas OECD bid

South Korea is likely to assume ahigher profile in Asian investmentcircles with its membership of theOECD club expected to be madeofficial by the year end. SouthKorea will accelerate the opening ofits financial markets. The lifting ofrestrictions on foreign ownership ofthe stock market will be of particularinterest and from 1998, foreignerswill be able to establish their ownbanks and brokerage houses.

Hong Kong

8/12/2019 1996 Issue # 10

12/23

8/12/2019 1996 Issue # 10

13/23


8/12/2019 1996 Issue # 10

14/23


US STOCK MARKET

The US share market has beendriven by capital flows to a largeextent originating out of Asia.Recently published data on foreignholdings of US government securi-ties has reached all time recordhighs. Since the dollar reached itslow against the yen in 1995, thedirectional change, combined withexcessively low interest rates inJapan, have sent Japanese pur-chases to almost 100% of thecurrent deficit. This foreigninvestemnt pouring into the dollar isalso affecting the US share market.

Whenever the Dow leads the broadmarket, this is a clear sign of foreigninvestment entering US equities.This is precisely the case at thistime for both bonds and shares.Therefore, one of the key factorsthat will determine both the short-term as well as long-term outlookswill be the fate of the dollar. At somepoint, the broader market will takethe lead from the Dow. When thisdevelops in the future on aconsistent basis, then a major highis not far behind.

The May 23rd high, which tookplace exactly in line with theEconomic Confidence Model, wasindeed almost identical in patternformation with that of 1987 - 8.6years prior. In both cases, thecorrection took place lasting only 2months. Our difficulty with the 1996version stems from the fact that weare not dealing with a free market aswas the case in 1987. The day of thelow in July was locked limit at 610on the S&P 500 futures. While thetarget support based upon ourReversal System stood at 598 and

605, it became impossible to reachthose objectives.

The question remains is this: Whatis more important time or price?Historically, price has been themost important factor in determininga major turning point as long astiming is reasonably correct. In thiscase, the timing was perfect but theprice was obstructed by limitationsimposed by government. It is stillnot certain whether or not the

market is satisfied with the July low.There does appear to be a risk thata high might form in early 1997followed by a correction thereafter.That correction could still reach598-605 on the S&P 500 withoutreversing the broader uptrend inmotion.

Timing models clearly warn that weare approaching yet another vulner-able period where a temporary highmight form. November and Jan/Febare two targets where a turningpoint of some importance is likely.The resistance basis the Dowstands at 6300. A November highmay be possible in the dollar/yencloses below 11345 at the end ofOctober. A closing above 11345warns that the dollar couldstrengthen even further pressingupwards to the 11800-12000 areaby January. This could cause a Jan/ Feb high in the US equities as well.

The worst possible pattern for theUS market would call for a rally intothe 1st quarter of 1997. This wouldthen signal a major correctionbecomes possible including anextended decline into as late as1998 around May/June. This type ofpattern would then set this marketup for a truly explosive move to theupside where the Dow JonesIndustrials could come very close toreaching the 10,000 market by2003.

We also see that a November highmay cause a brief decline into early1997 holding at worst the July lowarea of 610-598. Thereafter, a rallyduring the second half of 1997 maystill produce a 10,000 target on theDow by June of 1998.

Weekly timing models place keytargets for turning points 10/28-11/ 04 going into the elections andpossibly Yeltsins heart operation.The next target week appears to be11/25. Key target weeks in early1997 appear to be 01/13 and 01/27.

PRECIOUS METALS:

Gold and silver remain bearishshort-term and as we move closer toyear-end, both of these markets aretrading around very critical numbersthat will determine the outcome next

year going into 1998. In silver, theprimary numbers to watch are 480,462, 452 and 439. While short-termmodels suggest that a decline to462-452 is likely before anysustainable rally is possible, the keyfactor will be any rally after such alow. If silver manages to closeabove 480 at year-end then a rallyinto 1998 is still possible. However,a closing below 480 will warn thatsilver should press lower at leastinto early 1997. A closing below 439would warn that we could stillpenetrate 350 before any turn in thismarket develops.

Gold, despite recent weakness,remains rather strong from a long-term perspective. The key numberremains 371 and a closing belowthis area would warn that a drop to341 next year as being possible. Aclosing above 371 signals thatgetting gold to decline even $20may be extremely difficult. This willalso warn that a sharp rally couldbegin early next year moving into aninitial high in 1998. Resistance isbuilding at the 398.60 area for 1997.Our models are showing that aweekly and monthly closing backABOVE this level could signal thestart of the next big rally. Of coursethe final confirmation will remain apenetration ABOVE the 428.30

area. Nonetheless, 398.60 will be asignal that should not be ignored.

US DOLLAR

The US dollar is being pulled at fromall directions. The strength in thedollar against the yen is approach-ing legendary status. Here we stillsee that a monthly closing ABOVE11345 will signal a move most likelyup to the 11800 zone. Pressingmuch beyond that area will set thestage for a delightful move up to the12500 zone. Long-term, the dollarappears to be headed on its way totest the 14500 level by 1998.

The European view of the dollarremains distinctly different. Here awhole host of conflicting trends arecombining with serious geopoliticalconflicts not to mention the infa-mous rush to meet EMU criteria.

The three strongest Europeancurrencies against the DM within

World Capital Market Review

8/12/2019 1996 Issue # 10

15/23


Europe are the pound, Swiss francand Italian lira. It is no coincidencethat these are the three maincurrencies outside of the ERM atthis time. The DM appears to beheaded for a serious decline with adistinct risk of being unable toqualify for EMU in 1997. Add to thisthe nervous problems building withRussia and the right-wing positionin Russia being totally opposed toan expansion of NATO. Rumblingfrom Moscow have been reachingour sources in the West. If the fasttrack expansion of NATO takesplace, Russia may cancel notmerely its arms agreements unilat-erally with the West, but it maybegin to default or temporarilysuspend any repayment of loansand interest. The biggest loser inthis game is also Germany fromwhich almost 70% of the outstand-ing Russian loans originated. Tak-ing these risks into consideration,we can see why capital flows arepouring out of Germany headed to avariety of currencies other thanERM. This is helping to drive thepound higher as our computer long-range models have been predictingfor the past two years. The poundwill emerge as the strongestcurrency against the dollar withinEurope.

At this time, there is a small risk thatthe dollar could make a near-termcorrection going into early 1997.This risk will gain in importanceshould the dollar FAIL to closeabove 11345 at the end of October.As far as the DM is concerned, onlya monthly closing for the dollarabove 15840 would suggest thatthe dollar low is in place and that achange in long-term trend hasbegun. A monthly closing below13985 for the dollar vs Dmark wouldsuggest that the dollar will declinefirst before rising long-term.

US 30 YEAR BONDS

The change in the dollar against theyen has drastically shifted thecapital flows from Japan. Over thepast year, foreign holding of USgovernment securities has risen toall time record highs in excess of30%. However, this capital influx tothe US is also creating a lack ofdemand pressure on interest ratesas foreign capital takes up the slackfrom domestic capital. As a result,inflationary pressures in the US arebuilding keeping the Fed awake at

night with each rising tick the dollar.The danger here is that the majorityof that money going into USgovernment securities is headedinto the short-end of the market.Over the past year, Japanesemoney has accounted for nearly100% of the entire current fiscaldeficit. Most of this money is beinginvested short-term 5 years or lesswith a staggering amount beingtargeted in the 1 year or lesscategory. This is HOT money dueto the low 0.25% deposit rates inJapan for short- term cash. At thistime, this hot cash is merelyparking on a day basis due to apositive trend for dollar invest-ments. If the dollar fails to closeabove 11345 on a monthly basis,then any correction could seriouslyaffect US domestic markets.

Resistance is now starting to form atthe 11302 level on a weekly closingbasis while major resistance standsat the 11728 area going into the endof 1997. Support is starting tobecome very critical at 10814 asyear-end approaches. Despite theintense capital influx from Japan,this has done little to helpreestablish a breakout to the upsideon the long-end of the yield curve. Ithas helped to keep increasedsupply on the short-end of the curvefrom moving into an immediateinverted yield curve. Thus thetrading range remains 10800-11300. Only a weekly closing abovethe 11300 level will warn that thebond market is still capable oftesting the old highs. A monthlyclosing above 11216 will indeedshift the market back to a slightlybullish posture but a breakout to theupside appears to require a monthlyclosing back above 11606.

We do have to keep in mind that asharp correction in the sharemarket, political disintegration inRussia, breakout in oil and/orpolitical destabilization in the MiddleEast, a war unfolding in Korea or atougher posture in Hong Kong onthe part of China after July couldspark very intensive capital inflowsfor US assets. Any one or acombination of such events couldstill create new highs in the bondmarket despite a Clinton victory inNovember.

NIKKEI

The Japanese share market has

major resistance standing at the23000 zone as we go into early1997. Support is becoming criticalat 19879 on a monthly closingbasis. Should the Nikkei closebeneath this area on a monthlybasis, then a temporary top is mostlikely in place. This could still warnof a retest of the mid 17000 zoneand a penetration beneath this areamay warn that new lows are stillposible early in 1997. Indeed, amonthly closing below 18896 wouldwarn that a retest of long-termsupport is possible taking thismarket back to the 15292 level an apenetration of that area would pointto a drop possibly to 11500 in 1997.We also see that a mere closing for1996 BELOW 20813 will at leastwarn that this market is getting a bitweak short- term and that recentgains may not be sustainable.Yearly support for 1997 begins at17242. This will be vital support thatMUST hold next year. Penetratingthis area could spark a massive sell-off.

CANADA TSE

The Canadian share market basisthe TSE continues to follow theoverall pattern of the US sharemarket. The widespread belief thatthe proposed $50 billion bailoutfund discussed by the G7 is in fact

ear marked for Canada, implies thata debt default is not likely and that atworst we are looking at a repeat ofMexico. This external talk combineswith domestic trends where capitalcontinues to shift out of publicsector assets into private sector isalso helping the TSE domestically.Now if we consider the capital flowsfrom Europe interested in a possiblerising commodity play, and the endresult is a strong TSE.

Support in the TSE is starting tobegin at 51146. Here we see that a

monthly closing below this area willsignal a correction ahead. Like theUS market, major support will nowbecome the July low.

LONDON FT

The British share market basis theFT100 remains very strong break-ing above the 40000 mark for thefirst time in history. Here we see

8/12/2019 1996 Issue # 10

16/23


40335 as critical year-end resis-tance that must be watched. Aclosing above this area warns thatthe FT could press higher into early1997 where resistance will stand atthe 42111 level. Indeed, a closingfor 1996 above 36906 will signalthat a rally into 1997 is still possible.However, 1997 remains a key targetfor a top. A high in early 1997 willsignal a possible sharp decline ofimportance which could cause a1998 low to develop. Additionaltargets for an important top will be43340 during the first quarter of1997. Monthly models show amaximum target objective aroundthe 45000-46000 area. Timingmodels seem to coincide with thosefor the US share market.

GERMAN DAX

The German share market basis thecash DAX continues to remain verystrong despite future earnings.Here we see resistance stands atthe 26000-27061 area. PenetratingABOVE this level on a sustainedbasis could leading to a final rally upto the 34000 zone. Here too, timingseems to be very close to the UStargets. A new high early in 1997could prove to be a MAJOR high. Inthe case of Germany, the major lowremains that of 1966. Therefore, thebull market in Germany is MOREvulnerable to a major high than theUS or the UK. Here we are dealingwith a 30 year trend compared to 22year trends in the US and UK.

8/12/2019 1996 Issue # 10

17/23


8/12/2019 1996 Issue # 10

18/23


UNITED STATES

UNEMPLOYMENT: The US unem-ployment rate dropped from 5.4percent in July to 5.1 percent inAugust.

PURCHASING MANAGEMENT IN-DEX: The National Association ofPurchasing Management index roseto 52.6 percent in August, the thirdconsecutive increase. The figuresshowed no sign that inflationarypressures are growing. For the thirdmonth in a row, the NAPMs index ofprices paid by manufacturers re-mained under 50, a sign thatinflation is under control.

LEADING INDICATORS: TheConference Boards Index of Lead-ing Economic Indicators rose 0.2percent in July to hit a record high of103.1. But the increase, for thesixth consecutive month, was seenas indicating the kind of moderategrowth economists have beenexpecting in the second half.

RETAIL SALES: US retail salesgrew by 0.2 percent during August,much lower than the 0.7 percent risepredicted.

CONSUMER PRICES: Consumerprices rose by only 0.1 percent,below Julys 0.2 percent rate, andweaker than the forecast 0.3percent.

HOUSING STARTS: US housingstarts in August showed a rise of 4.5percent over July to the highestlevel for more than two years. Thestrength of the rise surprised WallStreet analysts who had projected adecline of about 1 percent.

The Commerce Department saidhousing starts rose to a seasonallyadjusted annual rate of 1.53m. Thebiggest gains were for single-familyhome starts, up 8.3 percent lastmonth.

BEIGE BOOK: Upward pressureon wages is becoming morewidespread in the US, but there isno clear evidence yet of astrengthening price inflation, ac-cording to the Federal Reserve in itslatest round-up of regional eco-

nomic conditions.

The summary of the Beige Book,which contains anecdotal evidenceof business conditions from the 12Fed districts, said the economycontinued to expand moderately inAugust. It suggests the economyhas maintained much of themomentum it enjoyed in the secondquarter of the year.

Only the San Francisco Fedreported that inflationary pressuresin its district were intensifying, butnone said that pressure on pricesshowed signs of easing. Few, ifany, districts reported big priceincreases since the last comparablesurvey at the end of July.

DURABLE GOODS: New ordersfor US durable goods droppedsharply in August, the CommerceDepartment said. New orders fell aseasonally adjusted 3.1 percentbetween July and August, morethan wiping out a 1.4 percent gain inthe previous month. Wall Streeteconomists had expected a declineof 0.1 percent.

Orders so far in the third quarter arerunning above their second-quarteraverage, pointing to continuedeconomic growth. The figures weredepressed last month by an erratic38 percent decline in aircraft orders.Excluding transport, orders weredown only 1.6 percent last monthfollowing a 2.4 percent gain in July.

UNITED KINGDOM

FACTORY OUTPUT: The latestmonthly survey by the CharteredInstitute of Purchasing and Supplyshowed that consumer demand wasnow driving a steady recovery inmanufacturing after weak ordersand a build-up of stocks pushedindustry into recession late lastyear.

The institute said its purchasingmanagers index was a seasonallyadjusted 51.8 last month. A readingabove 50 denotes an increase in

activity. This was the third succes-sive monthly increase. The pictureof buoyant consumer-led growthwas reinforced by separate figuresyesterday which showed that theamount of notes and coins circulat-ing in the economy grew last monthat the fastest rate since December1988. This suggests that the pick-up in retail sales continues to gathermomentum.

CONSUMER CONFIDENCE: Thelatest survey for the EuropeanCommission by Gfk, the pollingorganization, shows that growingoptimism about the economy isdriving the upturn in confidence,while consumers are also moreconfident about their householdfinances.

The news follows figures this weekwhich showed retail sales growingat their fastest rate since 1988,raising fears that present rates ofgrowth may be unsustainable andmay be stoking inflationary pres-sures.

INDUSTRY INFLATION: Inflation-ary pressures in industry fell to theirlowest level for almost 29 years inAugust, official figures showed

The Office for National Statisticssaid factory gate prices rose 2.0percent in the year to August,compared with 2.2 percent in July,continuing the downward trend ininflationary pressures in manufac-turing since last summers peak.The underlying annual inflationrate, which excludes food, drinks,tobacco and petroleum, fell to 1.2percent the lowest since October1967.

The low inflationary pressures inindustry reflect recessionary condi-tions in manufacturing since lastwinter. Companies were forced tocut prices to clear stocks of unsoldgoods as demand dried up, espe-cially in markets outside Britain.

They also reflect sharp falls inmanufacturers input costs, whichthe ONS said fell 0.3 percent lastmonth, the fourth successivemonthly decline. The drop meantinput prices were 2.1 percent lowerthan in the same month last year. Arise in the price of crude oil was

Capital Market Review

8/12/2019 1996 Issue # 10

19/23


more than offset by falls incommodities such as rubber andpaper and seasonal foods. Adjust-ing for seasonal factors, however,underlying input costs rose 0.1percent last month, the first monthlyincrease for 13 months.

RETAILERS REPORT: Business

conditions in shopping centers aremore upbeat than at any point sincethe consumer boom of 1988,retailers have reported. Thebusiness survey from the Confed-eration of British Industry, thecountrys main employers lobby,showed that retailers themselveswere now reporting an accelerationin price increases.

In the CBI report, two-thirds ofretailers said their sales werehigher than in August 1995. Onlyone in seven said they were lower.

Retailers have also stepped up theirorders and expect to increasethem further. This trend may befueled by the fact that the stock ofgoods held by shops is now lowerthan at any point for four years.

However, the trend also leftretailers confident that they did notneed to discount their goods asmuch as last year to attractbusiness: more than half saidprices were now higher than a yearbefore.

MANUFACTURING PRODUC-TION: The Office for NationalStatistics said manufacturing pro-duction rose by a seasonallyadjusted 0.5 percent. This left thelevel of output in the three months toJuly identical to the previous threemonths. Although the upturn wassmall, it provided a hint thatmanufacturing output was no longerin recession.

Government statisticians also be-lieve there are signs that the recentstock swings in manufacturing are

easing. They expect little change instock patterns in the third quarter.This should mean that any pick up indemand should boost output.

CONSUMER DEMAND: Manufac-turing appears to be emerging fromrecession thanks to a strong pick-upin consumer demand fueled bylower taxes, interest rate cuts andhigher personal incomes. TheBritish Retail Consortium measureof the value of like-for-like high

street sales was 6.9 percent higherlast month than a year ago. TheBRC said the latest rise confirmedthe steady acceleration in salessince last autumn.

FAMILY EXPENDITURE SURVEY:Families spent on average BP289.90($452.24) each week during the last

financial year (1995-96) and re-ceived an average weekly incomeof BP380.90, according to the latestfamily expenditure survey pub-lished by the Office for NationalStatistics. This compares withhouseholds average weekly ex-penditure a year earlier of BP283.60and average gross weekly incomeof BP369.30.

TRADE: Better exports to the USand South America helped cutBritains trade gap with countriesoutside the European Union to its

smallest level for 15 months inAugust but the deficit with EUcountries more than doubled inJuly.

The Office for National Statisticssaid the UKs overall trade gap withthe rest of the world was aseasonally adjusted BP1.2bn inJuly, higher than Junes BP1.1bndeficit and worse than the City ofLondon expected.

The deficit with EU countries rose toBP0.5bn from BP0.2bn in June.

Exports fell by 1 percent in themonth but imports from the EU rose2.5 percent. More encouraging wasthe trade gap with countries outsidethe EU, which fell to BP0.5bn fromBP0.7bn in July. This was helpedby a fall in imports from Switzerlandand Norway and stronger exports tothe US, Brazil and Saudi Arabia.

However, the trade performancewas flattered by oil and erraticitems. Stripping out these influ-ences, the underlying picture wasmore disappointing, showing import

volumes rose 2.5 percent betweenJune and July to record levels whileexports fell 0.5 percent.

CURRENT ACCOUNT : The UKhas recorded the biggest currentaccount surplus for nine years andthe first since late 1995, thanks torecord incomes from investmentand services. The Office forNational Statistics said the UKrecorded a current account surplusof BP0.5bn ($0.78bn) adjusted for

seasonal factors, in the secondquarter of this year, compared witha deficit of BP0.8bn in the firstquarter.

The surpluses on income from tradein services rose from BP1.2bn toBP1.9bn and investment incomeregistered a surplus of BP3.7 bn, up

from BP3bn. Both figures were thehighest since records began in1946. Services income wasboosted by a surge in visitors to theUK, which may be linked to thesummer Euro 96 football champion-ships.

The ONS said gross domesticproduct grew a seasonally adjusted0.5 percent between the first andsecond quarters to reach a level 2.2percent higher than in the samequarter a year ago. This wassignificantly faster growth than

earlier estimates suggested. TheONS said consumers expenditure,investment and net exports werenow growing faster than firstestimated.

UNEMPLOYMENT AND WAGEINFLATION: Unemployment in theUK fell in August to the lowest levelfor five and a half years, but wageinflation in some areas of the jobsmarket was the weakest for almostthree decades.

The Office for National Statistics

said the number of people out ofwork and claiming benefit fell by15,600 in August to 2,110,400, thelowest level since march 1991. Theunemployment rate fell to 7.5percent from 7.6 percent. The drop,the sixth consecutive monthlydecline, confirmed that unemploy-ment has now resumed its down-ward trend after rises last winterwhen manufacturing went intorecession.

Official survey-based measures of joblessness showed unemployment

was still rising earlier this year.However, the ONS said the numberof people employed rose 90,000 inthe second quarter, the biggest risefor almost two years. Almost all therise was due to new jobs in theservices sector. However, thelatest monthly figures showedmanufacturing may have begun torecover in the third quarter withemployment in July growing at thefastest rate since last October.

8/12/2019 1996 Issue # 10

20/23


JAPAN

GROSS DOMESTIC PRODUCT:Japans economy shrank slightly in

the three months to June. Grossdomestic product fell at an annual-ized rate of 2.9 percent in thesecond quarter, in reaction to arevised 12.2 percent increase in thefirst quarter, Japans economicplanning agency (EPA) announced.

Growth in the first three months hadbeen artificially pumped up by one-off statistical factors and a surge inpublic works spending, which hassince subsided to more normallevels.

The economy actually grew by 3.4percent in the second quarter whenmeasured by comparison with thesame period last year, a significantslowdown from the 5.6 percentyear-on-year growth of the firstthree months of 1996. This bringsgrowth for the first six months of thecalendar year to 4.5 percent, fromthe first half of 1995.

Growth in the second quarter wasled by the two factors most sensitiveto low interest ratescorporateinvestment and housing. Corporate

investment rose 1.6 percent fromthe previous three months, the sixthquarterly rise in a row, contributing0.2 of a percentage point to growth.Housing rose 3.7 percent, the thirdconsecutive quarterly rise, adding0.3 points to growth.

The main drags on second quartereconomic growth were privateconsumption, the biggest singlesector of the economy, and publicinvestment. Private spendingshrank 1.3 percent from the first tothe second quarters, after having

risen by 2.4 percent in the first. Thatremoved 0.8 of a point from growth.

Public investment rose by a mere0.6 percent, after a startling 8.7percent rise in the first quarter,making a 0.1 point contribution toGDP growth.

For the first time in two years, theGDP deflator, a measure of prices,swung positive, another sign of

recovery in demand. It rose by 0.3percent from the same quarter ofthe previous year, suggesting thatdeflation, a contributor to Japanseconomic stagnation of the pastfour years, might at last be easing.

RATE WILL REMAIN LOW: Mr.Yasuo Matsushita, governor of the

Bank of Japan, indicated thatJapanese interest rates would bekept low. The central bank wouldcontinue to put priority on solidify-ing the recovery base, he said.

Earlier, the governments EconomicPlanning Agency in its monthlyreport described the pace ofrecovery as mild. This wasunchanged from its assessment lastmonth, though it fell short ofregistering a decline in confidence,as shown in the Bank of JapansAugust survey of business condi-

tions.The EPA report said the labormarket remained weak, with unem-ployment at 3.4 percent, just belowa record high of 3.5 percent in June.Corporate capital investment wasimproving, but there was a longway to go before we have sustainedrecovery, led by private sectordemand.

The EPA cited a decline insemiconductor companies invest-ment plans as a concern, while

retail sales declined in the summerbecause of an epidemic of foodpoisoning. Supermarket sales fellby 2.5 percent in July anddepartment store sales were downby 2.9 percent. There was a modestrise in industrial production, but theEPA did not see any furtherimprovement in the pace of outputgrowth.

DEBT: The damage wrought byyears of slow growth and repeatedfiscal stimuli on Japans publicfinances was revealed when the

countrys finance ministry revealedthat the gross level of outstandingdebt owed by the central govern-ment stood at Y334,131bn($3,037bn) at the end of June.

The figure indicates a rapid deterio-ration in the fiscal position in the lastfive years, and is likely to renewcalls from the ministry and somepoliticians for an early movetowards consolidation of the na-tional budget.

But the broader picture of publicsector debt suggests that whilethere has clearly been a decline inthe nations fiscal health theunderlying position remains com-fortable.

During the last decade Japan hasmoved from being the most fiscally

conservative of the leading econo-mies to one of the most lax. Long-term central government debt atY302,146bn is now just under 60percent of gross domestic product.Next year, according to the countrysfinance ministry, the figure isexpected to rise to over Y320,000bn,or 64 percent of GDP.

TRADE SURPLUS: Rising oilprices contributed to a 31 percentdecline in Japans trade surplus toY369.47bn ($3.35bn) in Augustcompared with the same month last

year, the 21st consecutive monthlyfall, the finance ministry said.

The politically sensitive bilateralsurplus with the US decreased bynearly 17 percent to Y222.3bn,much faster than the 6.5 percent fallin July and the 18th consecutivemonth of decline. Japans surpluswith the European Union was downby 17 percent last month and thesurplus with the rest of Asia by 11.4percent compared with the samemonth last year.

Within the total surplus, exportsrose by 8.7 percent to Y3,472bn,easily outrun by the growth inimports, up 16.6 percent toY3,102bn. The ratio of finishedproducts to total imports rose afraction to 59.4 percent, a reflectionof Japans continuing shift fro anation of processors of raw materi-als for re-export, to consumers.Import growth, however, was un-usually swollen by a 54 percent risein Japans monthly oil bill and by thepurchase of three large aircraft fromthe US.

Exports were helped by the weak-ness of the yen, allowing theJapanese car industry to increaseoverseas sales by 18 percent.Exports of personal computers andother office equipment rose by 20percent.

MONEY SUPPLY: Japanesedemand remains modest on evi-dence released by the Bank ofJapan yesterday of a 3.7 percent

8/12/2019 1996 Issue # 10

21/23


growth in the main measure ofmoney supply M2 plus demandand time deposits in the year toAugust, a growth rate unchangedfrom the previous month. But onanother measure, broad liquidity,money growth is slowing, a conse-quence of lower bank lendinggrowth and a fall in public worksspending in August. Broad liquiditygrew by 3.7 percent in August, downfrom 4 percent in July and theweakest rise since April.

DEPARTMENT STORE SALES:Sales in Tokyo department stores inAugust rose by 2.5 percent from thesame month last year, after fallingby 2.7 percent in July, the first dropin seven months.

INDEX OF COINCIDENT ECO-NOMIC INDICATORS AND DIFFU-SION INDEX: The economic

planning agency said its index ofcoincident economic indicators re-mained in positive territory for thesecond month running in July. Thediffusion index, which nets outcurrent positive and negative datain a range of economic statistics,stood at 80 percent, well above the50 percent level that marks thebreak-even between growth andcontraction.

INDEX OF LEADING INDICA-TORS: The index of leadingindicators was above 50 percent for

the fourth consecutive month at77.8 percent, suggesting the imme-diate economic outlook also re-mains moderately healthy.

MACHINE ORDERS: Privatesector machinery orders in Japanrose in July a seasonally adjusted13.6 percent from the previousmonth after two months of consecu-tive decline, the Economic PlanningAgency said. The key orders private-sector orders minus volatileorders for ships and machineryused by the electric power industry

amounted to Y1,185bn ($10.8bn).The July orders were 22 percent upon their level the year before.

The agency traced the ordersupsurge to the trend of mildrecovery in Japans economicactivity as well as a Y50bn orderplaced by one corporation duringthe month. If that order is excluded,the month-on-month growth figurewould be in the 8 percent range.

SURPLUS: Japans current ac-count surplus declined by 27.3percent in July compared with theyear before, the result of strongimport growth and a rise in thenumber of Japanese taking foreignholidays, the finance ministry an-nounced.

The decline to Y568.2bn ($5.2bn),slightly sharper than the 25.5percent drop recorded in June,represents the 11th month in a rowin which the surplus, a source ofcontinuing trade tension, has shrunk.

Within the total, the surplus ongoods and services fell by 79.3percent to Y110.8bn. The servicesaccount fell Y619bn into the red, a35 percent increase on the servicesdeficit in July last year, a reflectionof the rise in tourism. It was thebiggest monthly services deficit for

11 years. The surplus on merchan-dise trade fell by 26.4 percent toY730.1bn over the same period. Itis the smallest July trade surplus for11 years.

Exports rose by 16 percent, greatlyoutstripped by a 35 percent rise inimports, reflecting a modest recov-ery in domestic demand from theunusually low level of mid-1995.imports rose across the sectors,with a 49 percent rise in thepurchase of crude oil, reflecting theusual summer increase in the use of

air conditioners, a 53 percent rise inimports of office equipment and a 46percent increase in purchases ofclothes.

On the export account, foreign carsales rose by 35 percent, a reboundfrom unusually depressed sales inthe same period last year, whensales to the US were held up by atrade dispute and US threats ofsanctions. Exports of personalcomputers and office equipmentrose by 28 percent.

WHOLESALE PRICES: The Bankof Japan said wholesale pricesdeclined by 0.7 percent comparedwith a year earlier, confirmationJapan suffers from continued ex-cess domestic capacity, as a resultof which inflation is non-existent.

PRIME RATE CUT: The IndustrialBank of Japan announced a cut of0.3 percentage points in its long-term prime rate, a benchmarklending rate for first-tier customers,

in response to a lingering weaknessin business confidence. It was thefirst prime rate cut for three monthsby the IBJ, Japans largest long-term credit bank.

Two other long-term credit banksare expected to follow suit and themove, which will ease funding costs

for companies, could help increasecapital investments at a time whencorporations are looking to raisespending.

The bank attributed the cut todeclines in market rates followingthe release of the tankan, thequarterly survey of business senti-ment, last month. While expecta-tions of a rise in the official discountrate had earlier in the year pushedup market interest rates, the surveyrevealed that overall confidenceamong leading manufacturers had

weakened, leading to a fall in bondyields and money market rates.

GERMANY

DECLINE IN PHONE COSTS: Thecost of telephone calls in Germanywill fall by about 6 percent onJanuary 1, 2000, the latest ofseveral tariff changes designed to

force down prices, the post andtelecoms ministry said. Severaltariffs were reduced earlier this yearand are due to fall by a further 4.5percent in real terms on January 1,1998, when most of the EuropeanUnions telecoms markets will opento full competition.

The reductions planned for 2000(whose real effect will depend oninflation at the time) will take theform of a price cap which meansthat all tariffs across the board mustbe reduced. Tariffs will still have to

be agreed by the new regulatoryauthority.

FINANCIAL SUPPORT FOR EASTGERMANY: The German cabinetagreed that federal financial sup-port for businesses in easternGermany should be kept at a highlevel from 1999, when currentplans expire.

After reviewing a progress report onthe eastern German economy, Mr.

8/12/2019 1996 Issue # 10

22/23


Gunter Rexrodt, the economicsminister, said details of the aidwould be fixed next year when thegovernment had a better idea of theimpact of tax changes due in 1997and the large scale tax reform that itis planning for 1999. He indicatedthat aid would be focused onmanufacturing industry, and espe-cially the small to medium-sizedMittelstand companies.

The minister said eastern Germanycontinued to suffer from too narrowan industrial base and providedonly 2 percent of Germanysexports. Unit labor costs were toohigh: they averaged 131 percent ofwestern German levels last yearand were higher than the yearbefore. Eastern German compa-nies also had insufficient capitalresources and suffered liquidityshortages.

However, the minister forecast thatgrowth in the new Lander would behigher than in the west, although theperiod of exceptionally fast expan-sion was over. The economicsministry expects that western sup-port for eastern German companieswill amount to about DM25bn($16.6bn) this year out of nettransfers totaling DM144bn.

MONEY SUPPLY: The Bundesbanksaid that August M3 money supplywent up by an annualized 8.7

percent against the fourth quarteraverage of 1995. The M3 growthrate, which was slightly ahead ofexpectations, compares with ratesof 9.6 percent in June and 8.6percent in July. The rise in M3 hasonce again triggered market com-ment that the Bundesbank mayhave reached the end of the cycle ofinterest rate cuts.

INDUSTRIAL PRODUCTION: Ger-man industrial production was 0.2percent higher in July than in June.The seasonally adjusted month-on-month figures were driven by a 4.2percent surge in building output, butthe economics ministry warned theincrease reflected efforts to catchup on work lost rather than newgrowth. Losers on a month-on-month basis were non-durableconsumer goods, down 3.9 percent,and mining, down 3 percent. On acalendar-adjusted year-on-year ba-sis, July industrial production was0.5 percent above July 1995, withstrongest growth in consumer

durables (7.9 percent) and invest-ment goods (3.3 percent).

SOCIAL SECURITY SPENDING:Germanys spending on socialsecurity rose 4.7 percent to a recordDM52.1bn ($35.4bn) last year,reflecting the growing number ofelderly and unemployed. Spending

of the old and handicapped wasDM33.3bn, while other incomesupport totaled DM18.8bn. Ger-many also spent DM5.5bn fundingasylum-seekers, a fall of 1.7percent on 1994. Mr. HorstSeehofer, health minister, said thefigures underlined the need toreform the national health service.

NEW ORDERS FOR MANUFAC-TURING: New orders for Germanmanufacturing industry rose 0.6percent in July, bolstering hopesthat second quarter growth will

carry over into the third quarter. Butanalysts warned that growth wouldbe slower than in the secondquarter, when manufacturing ordersrose 3.8 percent over the previousquarter. Domestic demand wasweaker in July, falling 2.9 percentcompared with a 5.2 percentincrease in June.

GDP: The German governmentupgraded its forecast of economicgrowth for this year after a higher-than-expected jump in output in thesecond quarter.

Mr. Theo Waigel, the financeminister, said 1 percent real growthwas now likely in 1996. Beforenews of a 1.5 percent seasonallyadjusted rise in gross domesticproduct between the first andsecond quarters, the governmenthad been predicting growth of 0.75percent. He said Bonn was stickingto its goals of a DM56.5bn($38.1bn) federal borrowing re-quirement and a 2.5 percent cut inspending to DM440bn next year,despite risks posed by high unem-ployment.

Looking ahead to the income taxreform planned for 1999, Mr.Waigel said this would includeabolition of the solidarity surcharge,which helps finance eastern Ger-many. The government wanted tocut the top tax rate to below 40percent from 53 percent and set aninitial tax rate of about 20 percentagainst 25.9 percent.

INFLATION: The statistics officesaid pan-German inflation fell to ayear-on-year 1.4 percent in Augustfrom 1.6 percent in July after asharp drop in east German inflationto 1.8 percent from 3 percent.

TRADE SURPLUS: Germanysvisible trade surplus fell to DM7bn in

June from DM9.5bn in May.GDP: Germany returned to growthin the second quarter, but risingunemployment last month and asober report on the economy fromthe Organization for EconomicCooperation and Development gavelittle hope of the countrys unem-ployment crisis easing.

On a seasonally adjusted basis,gross domestic product jumped 1.5percent from the first quarter, whenthe economy declined 0.5 percent,

the federal statistics office said.GDP was 1.2 percent higher than inthe second quarter of last year afteryear-on-year growth of just 0.2percent in the first three months of1996.

Germanys return to growth be-tween the first an second quartersowed much to an unprecedented11.5 percent jump in constructionactivity, which made up for the 9.5percent drop during the first quarter.The statistics office pointed to a 2.5percent increase in export demand

and a 3.6 percent jump in public-sector consumption as importantfactors behind the year-on-yeargrowth of 1.2 percent.

UNEMPLOYMENT: On an unad- justed basis, Germanys August jobless total of 3.9m was 9,950below that of July but 323,500higher than in August last year. Thenations unemployment rate heldsteady at 10.2 percent of theworking population last month, witha continuing sharp divergencebetween the 15 percent jobless rate

in former Communist eastern Ger-many and 9 percent in the west.

NEW ORDERS FOR ENGINEER-ING INDUSTRY: New orders forthe German engineering industryfell 18 percent in August comparedwith a year earlier, the VDMAengineering industry associationsaid after its survey of 1,200 largerengineering companies. A 16 per-cent fall in foreign orders wasexplained by an unusually high set

8/12/2019 1996 Issue # 10

23/23


of orders in August 1995, the VDMAsaid, but it could not offer anexplanation for 20 percent drop indomestic orders. More reliablethree-month figures showed neworders 6 percent lower than in theJune-August period last year.

INDEX OF BUSINESS CONFI -

DENCE: Indications of a modestupturn in the economy werecorroborated by the monthly IFOconfidence indices. The westernGerman index edged up from 94.0in July to 94.4 in August, which isthe combined effect of morepessimism about current businessconditions and more optimismabout the future. The east Germanbusiness confidence index rosefrom 102.9 to 103.9. Monetarycapital formation continued toweaken in August because of slackdemand for longer-dated instru-ments.

FRANCE

NEW CAR SALES: New car salesin France surged by around 90percent in the first half of Septemberof year-earlier levels. The surge indemand has been propelled by theimpending expiry of a state rebatescheme, an industry official said.

UNEMPLOYMENT: Unemploy-ment in France fell a seasonallyadjusted 0.7 percent in July to3.05m, confounding fears that the

jobless total could hit a new record.The unemployment rate, based onInternational Labor Organizationcriteria, was unchanged at 12.5percent.

TRADE SURPLUS: Mr. YvesGalland, trade minister, suggestedthat this years trade surplus couldset another record, higher than lastyears FFr104.5bn ($20.5bn). Thelatest statistics showed a marginalimprovement in the countrys first-half trade performance, with thesurplus rising to FFr53.28bn fromFFr52.9bn in the first half of 1995.The surplus for the month of Junewas down substantially from levelsa month earlier, however, atFFr9.75bn against FFr11.24bn.Both imports and exports fell.

GDP: The French economy con-tracted more sharply than expectedin the second quarter this year.Figures released showed a 0.4

percent decline in second-quartergross domestic product, against ananticipated fall of 0.2 to 0.3 percent.

TAX CUT PLAN: Mr. Alain Juppe,French prime minister, rushed out asweeping package of tax cuts.FFr75bn ($14.8bn) would be wipedoff income tax over the next five

year, with taxpayers receiving athird of the reduction next year.

The net reduction in taxes in 1997would be FFr18bn, with income taxcuts offset by FFr7bn increase

Documents

1996 Issue # 10