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he new US $100 bill iscausing quite a stir notmerely inside the United

States but also around the world.Full scale currency panics are un-der way in a number of countrieswith particular significance in Rus-sia where over $20 billion of UScurrency circulates freely as part of

the money supply.

Jumping on an internationalflight from the US these days bringsthis issue of a panic to light. The USTreasury has been launching amassive advertising campaign try-ing to reassure the world public thatthe old $100 is still legal tender andwill continue to be so in the future.Not mere do these advertisementsappear on the movie screen of oninternational flights, but the Secre-tary of the Treasury has become a

familiar face on Russian TV.

Exchanging old $100 bills for thenew version has become such a bigbusiness overseas that up to 5% isbeing changed by Banks just toswap the notes. Even the Russiangovernment has jumped into thescam by imposing a tax on the ex-change of the notes.

So what is going on? Is there ahidden agenda that the US govern-ment is not admitting to? Or is therea real reform going on to stamp outcounterfeiting?

There is little doubt that thecounterfeiting of US currency hasreached huge proportions outsidethe US. While it is an issue thatremains largely undiscussed, thetruth of the matter is quite concern-

ing. The largest counterfeiting ringis actually in Asia and this is a frontfor the Chinese military. The sur-prising aspect here is that the $50bill is not being replaced. The coun-terfeits of this note are excellentand are wildly known in Asia as"Hong Kong Fifties." Stopping thistype of counterfeiting is going to beimpossible. The new $100 note willat least make things more difficultfor the counterfeiting rings but byno means will it come to and end.

International concerns haverisen to such a height over the issueof cancellation largely because thisis routine practices throughoutEurope. Most European nationscancel their currency right down tolarge denomination coins aboutevery 10 years. This is a tactic thatis used largely for the purposes oftaxation. Cancelling the currencyonce every 10 years forces thepublic to redeem their notes thus

thwarting the efforts of tax evaderswho stockpile cash in their safetydeposit boxes. This, at least, doesnot appear to be the purpose of theTreasury at this time. Nonethelessit is an option that they are verymuch aware of and can becomereality perhaps by the turn of thecentury.

Domestic concerns are centeredaround the presence of a strip in

side the paper that can be read bya scanner. With the proper equipment, it will be possible to deter-mine how much cash someone hason his person. This, however, doesnot appear to be a major risk oprivacy at this time. Nonetheless, iis a valid concern for the futurewhen budget get tight and government is desperate for revenue. Parof the penalty for not declaring theamount of cash on your person acustoms includes the governments right to confiscate the funds

entirely. That does offer a big advantage over merely taxation.

The question of conspiracyseems to be the hot topic on talkshows around the nation. Is this aconspiracy to expand the powers obig government? The answer tothis is perhaps. The more importanissue is that government has beenroutinely starving the public from amoney supply perspective. Even

Issue #4 April 1996 Copyright Princeton Economic Institue all rights reserved214 Carnegie Center,Princeton NJ 08540 609-987-9522 Annual Subscription US$49.95

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during the 1930s, the Treasury is-sued $500, $1,000, $5,000 and$10,000 bills for general circula-

tion. If you can imagine that anautomobile sold for only $600 atthat time, a 1,000 bill was indeed alot of money. You would think thatgiven the massive level of inflationsince World War II, $1,000 billsshould be part of the normal moneysupply today. The reason that largedenominations are NOT is circula-tion is due solely to the govern-ments policy of trying to starve theunderground economy.

This starvation of cash on the

part of government has nothing todo with the drug trade since the last$1,000 bill issued was back in1934. The real conspiracy here, ifyou must use that word, is the factthat government is attempting toallow inflation to naturally reducethe importance of cash within oursociety. The goal is clear. If themajority are forced into the elec-tronic system of banking, then thegovernment will be able to more

efficiently collect its share of reve-nue. Large denomination noteswere withdrawn from circulation at

the same time when the majority ofcitizens found themselves subjectto income tax following World WarII. This also coincided with the in-troduction of the payroll tax system.The issue is not so much scanningpeople at airports - it is a definitive

attempt by government to reducethe importance of cash within oureconomy to further enhance taxcollection efforts.

In the final analysis, the introduc-tion of the new $100 bill may havesomething to do with conterfeiting.

However, the risk is clear that atsome point in the future the govern-ment could very well demonitizethe old $100 note as we enter thecentury.

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fficial figures releasedlast month on the UKsbalance of payments

show the current account movingfurther into deficit last year. The1995 figures was BP6.7 billion inthe red, three times the size of the1994 deficit, confirming the extentthat UK exports of goods and serv-ices have been hit by decliningEuropean markets, particularlyGermany. GDP grew by 2.5%, adownward revision of earlier esti-mates and investments, estimatedas 2% growth actually fell by 0.5%in the fourth quarter as public sec-tor investment was reducedsharply. Personal savings as a per-centage of disposable income in-

creasaed to the highest level since1993 but in contrast companiesrcorded a financial deficit for thefirst time in three yeras largely dueto higher dividend payments. Directinvestment overseas by UK com-panies rose to a record high ofBP24 billion in 1995. Direct invest-ment by overseas companies intothe UK also rose to a record levelwith a sharp increase in the 4thquarter reflecting overseas com-pany takeovers of UK companies.

The "Mad Cow Diseaase"panic, (Bovine Spongiform En-cephalitis) has vindicated thosecritics of the food rendering indus-try who have forecasat such a crisisfor many years. The impact ondairy and beef farmers, processorsand equipment supplies will bequite severe at a time when thissector of farming was already see-ing returns lowered by between10% and 25%. However, the crops

sector of farming saw a 32% in-crease in income last year andhigher cereal prices are likely toimprove returns this year again.The governments handling of thecrisis was rightly criticised severelybut it also highlighted the increas-ing public opinion against EEC con-trol of UK affairs following the beefand beef products export ban im-posed by Brussells.

A new political grouping, the

"Referendum Party", partly fi-nanced by the Anglo-French basedfinancier Sir James Goldsmith, isgaining momentum in its attempt tocontest every seat in the next UKgeneral elections. Although pres-sure is mounting on Prime MinisterMajor to hold a referendum on thecommon European currency, theReferendum Party is tapping intothe mounting feeling of fear thatBritish sovereignty will be lost tofaceless bureaucrats in Brussellsand national self-determination will

be a thing of the past.

Not only is public opinion in ex-isting EEC countries challengingpolitical ideals to understand therationale for convergence ofeconomies in Europe, countrieswaiting in the wings for admissionsuch as Cyprus are pressing politi-cians harder for information onpractical rather than emotional ad-vantages. There is a growingawareness that a united Europeaneconomy, even if it is possible,would benefit Germany and Francemore than the smaller economies.A central European finance author-ity is unlikely in their view to maketheir currency and industry morecompetitive against the needs ofthe major economies at a timewhen they foresee a reduction inEEC commitments to provide fi-nancial investment and subsidies.

Money for old "notes"

The redesigned $100 banknotehit the streets of Russia last monthwith a $1 million publicity campaignby the US government which hasmade a television start out of MrRobert Rubin in an effort to convince Russians you can stil trusUncle Sam. Russians are the largest foreign holders of USbanknotes to the tune of some $20billion in circulation. While the minimum 2% replacement fee chargedby Russian banks perhaps dampened enthusiasm for the newnotes, the Russian state customshad no hesitation in cashing inThey announced a 0.1% levy onbanks shipping the old notes outThe government already charges0.15% of face value on all foreigncurrency imports.

While the Israeli-Palestine problems continue to command attention, the instability of the PersianGulf countries and their impact onthe Kingdom of Saudi Arabiashould not be overlooked. Oil wasfirst discovered in the region on theIsland of Bahrain in 1938 and whils

production of the onshore fields isnot minimal, Bahrain draws heavilyon revenues from a 50:50 sharingarrangement with Saudi Arabiafrom an offshore field situated ontheir mutual border. Like Saudi Arabia, the majority of Bahrainis areShia Moslems including a smallenumber of Iranian Shias who havelived in Bahrain for several generations but whose ties are more withIran than the ruling Sunni minority

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A form of democracy existed afterindependance from Britain in 1971until the National Assembly wasdissolved in 1975. An armed rebel-lion was put down within hours in1981 but the frustration of the ma-jority has fermented and led to thebeginning of the current agitation

18 months ago to reinstate a moredemocratic government. Riots inthe last few months have met witha hardline response by police andmilitary. The Saudi governmentsconcern that a domino effect wouldincrease their own problems issuch that they have reportedlyagreed to give Bahrain up to 100%of the shared oil field revenues inreturn for a continuing hard line re-sponse. The ruling Al Khalifa familyin Bahrain appears to consider noalternative but to resist charge, a

strategy that history would booklong odds on success.

The next tinder box to keep aneye on will be the elections comingup in Israel during the last week ofMay. The opposition, if successful,intends to put the breaks on theland for peace process. Needless

to say, these elections will becomecritical to market behaviour particu-larly around late May to early Junewhen our Economic ConfidenceModel calls for a major change inthe world capital markets.

The fact that this election in par-ticular is lining up with our Eco-nomic Confidence Model is not agood sign for the peace process.There is definately a risk that aserious directional change is com-ing in the Middle East.

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ost restaurants that en-deavor to offer a taste ofRussian dining will in-

variably include on their menusborscht, pirozhki, blini, beluga cav-iar, and chicken Kiev. Granted,Kiev is in the Ukraine but taking thisdish off the Russian menu wouldmean many disappointed diners.Translate this into Russian politicsand you end up with the outlandishParliamentary vote by the commu-nist majority on March 15th thatdeclared the dissolution of the So-viet Union in 1991 to be unconstitu-tional and invalid. President Yelt-sin condemned this resolution asscandalous whi le Georg ia,Kazakhstan, and indeed the West,were quick to express their outrageat such a proposition. If the commu-nist sweep of the December Parlia-

mentary elections added uneasi-ness to the state of Russian affairs,the past six weeks have certainlygiven a sense of schizophrenia.The shifting financial market, thedomestic presidential politiking,and the international posturingmakes the coming presidentialelections in June anyones guess.

Russia Tells Clinton to

Keep his Chicken in

Arkansas

A recent dispute over USchicken exports underscores theinfluence that the revived commu-nist party is affecting on foreign pol-icy and reflects the creeping desireof the Russian people to slip intoeconomic and political protection-ism. A $10 billion IMF loan was

recently secured by Russia to bepaid out over three years. Certain

economic objectives and tradestipulations were negotiated. How-ever, Russia remains unwilling todisabuse herself from super powerstature abroad or at home.

In early February, Russia an-nounced that it would halt USchicken imports by mid-March un-der the guise of health safety andregulations. The choice of banningthis commodity carried some politi-cal irritation since the largest USpoultry producer is located in Presi-

dent Clintons home state. In 1995,85% of Russian poultry came fromthe US, constituted 20% of USpoultry, and totaled approximately$600 million. By early April, the is-sue had made alot of noise but wasbasically waffled and moot. In theend, both countries are negotiatingover tariffs while exports continueto be shipped. The nature and con-tent of this trade dispute revealedtwo distinct political camps compet-ing for influence in Russia. ForYeltsin, he accomplished two politi-

cally important tasks: publicizingthe ability and duty of the Presidentto pursue economic policies thatheed the social and economic con-cerns of the people; cultivating animage of the necessity of Russia tobe consulted in economic and po-litical negotiations if her marketsare to be accessed. For the Com-munist Party and their candidateZyuganov, they achieved a do-mestic image of a strong, protec-tionist position against the devas-tating capitalist policies of the

West.

NATO expansion is still a volatileissue and has gained even moreprominence through presidentialcampaigning. Communist Partycandidate Zyuganov has vowed tooppose any expansion. Yeltsinhas taken to vehemently cam-paigning against it at home andabroad - most recently in Norway.

However, diplomatic liaisons havemade signals that compromise on

NATO is feasible if expansion islimited to political concerns andmilitary guarantees without thehardware or troops. Again, what isbeing sounded out domesticallyand on the campaign trail is moreclosely related to domestic politicaposturing than any coherent foreign policy direction. Expect themonths preceding the June elections to be marked by shifting andcontradictory positions.

Dont Count YourChickens Before

Theyre Hatched

Russias trade shenanigans andparliamentary votes have put worldlending institutions on edge. Although Yeltsin parleyed the IMFloan as a sign of international sup-port for his leadership, the opposi

tion has also played the issue to thepopulist notion that Russia is selling out to the West. The IMF haswarned that the loan may be suspended if the communist party candidate Zyuganov wins the Juneelection and then pursues any contradictory policies. Similar to thepreceding $6.5 billion loan, the newloan contains several stipulationsmonthly auditing for the first yeartargets of 1.9% monthly retail inflation rate declining to 1% within ayear, 3.85% of GDP budget deficit

removal of all export tariffs by Apr1 with energy tariffs by July 1, 1996and continued progress on financial legislation and monetarymechanisms. The first tranche othe $10 billion IMF loan has beendisbursed but Russia has yet to lifthe export tariffs ($4 billion will bedelivered in the first year). Facinga revenue short-fall but committedto cutting energy tariffs as prescribed under the IMF loan, Russia

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is seeking to raise excise taxes.Analysts warn that this will increasedomestic energy prices and driveup inflation while still falling short ofneeded revenue.

The EU, Russias largest tradingpartner, extended a $1.2 billion

grant to Russia. The grant comesfrom the Tacis program which pro-motes the transfer of informationand experience to aid developmentin various sectors ranging fromgovernment administration to agri-culture. However, Russia is mak-ing waves by insisting on protec-tionist tariffs of up to 20% on EUimports. EU representatives aremiffed as general guidelines andpolicies had just been negotiated atthe end of February that provide forconsultation before such moves

are employed.

The London Club renegotiatedVnesheconombank defaulted So-viet loans and received $170 mil-lion in payment. The Paris Clubdeferred a $34 billion debt pay-ment. In doing so, the group ofwestern creditor nations took a ma-jor step to providing Russia with acredit rating for the first time sincethe break up of the Soviet Union. Inthe meantime, Germany andFrance have provided billions of

dollars in loans to help Yeltsin so-lidify support against the commu-nist opposition and to meet hiscampaign spending promises.

The new loan and debt agree-ments are not a sure bet on Rus-sias financial and political sol-vency, particularly in light of theDumas vote to annul the 1991 ac-cord that dissolved the Soviet Un-ion. Adding to creditors discomfortis the campaign rhetor ic ofZyuganov who consistently leads

Yeltsin in opinion polls by a mini-mum of 8 points. As part of hisplatform, the Communist Party hasendorsed reconstituting the SovietUnion, renationalizing banks andindustries, and setting price con-trols for certain retail and food prod-ucts. Several resolutions to comeout of the Duma are raising eye-brows also. A presidential decreeallowing for private ownership ofland was attacked as unconstitu-

tional and against the interest offarmers. The order included direc-tives to issue deeds and allows forpurchases and sales. The factthat a fundamental premise of afree market - private property - isfacing new attacks in one of Rus-sias legislative bodies highlights

the stakes at risk in the comingpresidential elections.

Game of Chicken

Anyone?

For investors and fund manag-ers, involvement in Russias mar-kets has been a high risk climatebalanced with high returns. Rapidprivatization and developing mar-ket institutions have opened upvast investment opportunities. Butthe high risk/high return climate hasedged closer to a game of chicken.The unabated growth in organizedcrime and the high stakes of thepresidential election has left manyplayers lining up on the sidelinesuntil June 16th. Still, positive eco-nomic indicators and continued de-velopment of market mechanismskeeps Russia one of the most in-tensely watched of the emergingmarkets.

The trading band set a year agofor the ruble has been maintainedat 4,650 to 5,150. However, thesteady decline of the ruble hasprompted the central bank to inter-vene by selling hard currency re-serves on 3/04 for $13 million, $8million on 3/14, and most recentlyon April 11. Although the ruble hascontinued to decline in trading to4,901 on 4/11, it has appreciated inreal terms, regaining 71% in pur-

chasing power in the past year.Demonstrating the governmentsgrowing confidence in the eco-nomic reforms, Yeltsin revealed alarge package of tax and currencyexchange proposals that wouldmake the ruble fully convertible fortrading transactions.

Data suggests that Russiaseconomy may be stabilizing as de-clines slow. The GDP for the first

quarter of 1996 was down 3% fromlast year while industrial output de-clined 4%. The Ministry of Financereports a 1995 budget deficit of2.9% of GDP which was 20% lowerthan anticipated. The peak ofmonthly CPI was 18% in 1995 andsuccessfully brought down to 3%

by years end. Recent figures re-leased from the State StatisticsCommittee reported that in Febru-ary the CPI had its smallest weeklyincrease (.4%) since prices werefreed in January of 1992. Con-sumer price inflation stood at 2.8%in mid-March indicating that lastyears tight monetary policies werebeginning to bear fruit.

The Finance Ministry reportedthe possibility of tapping into pre-cious stone and metals reserves in

light of wage shortfalls. However,the central bank made known itsdesire to see more effective taxcollection as the means for revenueas hard currency reserves havebeen depleted. The Russian StateTax service reported collecting only43% of budgeted tax revenue total-ing 150.2 trillion rubles ($32 billion).These figures, however, are a post-inflation increase of 230% over1994. In terms of GDP, 1995 taxrevenue equaled 9.1% while 1994produced 7.9%.

The central bank, chaired by Du-binin, has taken several encourag-ing steps in the development of theRussian market system. A Lom-bard rate (on par with the FedFunds rate) has been introduced inan attempt to attach interest rateswith a market mechanism. Begin-ning the first of May, the hard cur-rency deposit reserve rates will becut from 1.5% to 1.25%. The re-serve requirement on bank depos-its will be reduced to 18% from 20%

for deposits up to 30 days. Thenon-market refinancing rate tocommercial banks has been cutfrom 160% to 120%. The reductionof reserve requirements wereaimed at helping several commer-cial banks facing insolvency. Still,the market continues to face prob-lems with liquidity despite interven-tion by the central bank and largedebt auctions.

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In other developments, Micex -The Moscow Interbank CurrencyExchange - is on track to begintrading futures contracts in the DM,the USD, and GKOs (t-bills). Theestablishment of these instrumentsis pending on current talks with thecentral bank to allow GKOs and

OFZs (t-notes) to be used as de-posits for trading. The last govern-ment debt auctions sold 2.8 trillionrubles ($570 million) of GKOs.GKO yields were at 112% after ris-ing 5.8 percentage points. Lastmonths yields were peaking at120% with several different issuesmaturing within a short period oftime. 49-day bill auctions pro-duced yields of 61.9% in compari-son to last weeks 50-day bill yieldof 71.8%. Approximately 4% ofRussias gross domestic product is

dedicated to the GKO market.

Why Did The Chicken

Cross the Road?

By any measure, 1996 is shap-ing up to be a critical juncture in thepolitical and economic evolution ofthe former Soviet Union. Aftermuddling through five years of po-litical uncertainty and economic de-cline, Russia is approaching an-other test of democratic and free

market resolve. Yeltsin must notonly persuade the electorate tocross the road, but he must con-vince them that getting to the otherside is an end unto itself and thatonce there, the reasons will beclear and the benefits felt by all.But the Russian people have grownimpatient with free-market riddlesand rhetoric as evidenced by thecommunist victory in Decemberand the tight presidential race be-tween Zyuganov and Yeltsin.

Yeltsin has realized this and be-gun to aggressively campaign -building on themes of "social andeconomic rights", raising livingstandards, fighting crime, andstimulating domestic productionand job growth. He has made over$14 billion worth of spending com-

mitments. A presidential reservefund was set up in early Februaryholding over $6 billion to ensureprompt payment of wages andsalaries. An additional $4 billionhas been dedicated to pensionersand the mining industry. Yeltsinpromised a 40% increase ($630

million) in funding to coal miners inorder to end a strike. In 1991, thisinfluential group helped sweepYeltsin to power but now standsready to cast their vote with theopposition. These spending commitments have some officials andcreditors warning that it may doublethe budget deficit, increase inflation, and put economic reforms arisk. Nevertheless, recent polls indicate that this strategy is workingas Yel ts in edges c loser toZyuganov.

Yeltsin has also incorporated theend of the Chechnyan War as acampaign promise. Over $4 billiondollars for reconstruction in thisdevastated region has been committed. The President had offereda peace plan and cease fire at the

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end of March but the implementa-tion never left the paper. Russiansoldiers continue to demolish vil-lages, engage in sniper warfare,and even bombed a civilian build-ing. Defense Minister Pavel Gra-chev has cited the Chechen rebelsas "cancerous tumors" that must be

cut out. Complete cessation ofhostilities is a viable campaignpromise to the voters but an unre-alistic proposition to the military es-tablishment. Yeltsin will need thesupport of the military not only towin but to keep control if he does.The Russian Interior Minister un-derscored this situation when hecalled for renationalizing severalcommercial banks to address thecritical circumstances of the mili-tary caused by a "drastic shortageof budget financing." Kulikov

warned that the rapid deteriorationof the armed forces as well as thespiraling crime rate could lead to acrisis equivalent to that of the 1917Bolshevik revolution. Yeltsin hasnow promised increased fundingfor recruiting, procurement, andsalaries during his speeches.

The polls have consistently

tracked Yeltsin behind Zyuganov -both of whom are formally regis-tered presidential candidates in ad-dition to nationalist Zhirinovsky.

One million signatures from 15 re-gions of Russia are required forformal entry. {However, for a mere1.6 billion rubles ($318,000) onemay purchase a dubious list. TheCentral Electoral Commission hasrefused to hear a filing regardingthe legality of this entrepreneurialactivity.} After the December Par-liamentary elections, Yeltsinspopularity could easily be foundaround 4-7% while Zyuganov en-joyed ratings in the high teens tomid-twenties. However, Yeltsin

has slowly been gaining to trim thegap to 14 points in January, 12 atthe end of February, 10 points bythe end of March, and latest indica-tors track him at 8 points behindand gaining. Russian equity andsecurity markets have rallied in re-sponse to Yeltsins growing sup-port.

Several pro-reform and centristgroups have been approached by

Yeltsins campaign staff in an effortto consolidate their support. OurHome is Russia (Chernomyrdin)has already stepped up to supportYeltsin. The most popular reformparty, Yabloko (Yavlinsky), has notyet endorsed Yeltsin. The surpris-ing appearance of Gorbachev as a

presidential candidate (althoughnot yet formalized) has had no vis-ible affect and his press coverageis non-existent. Zhirinovsky hasformally entered the race but is in adis tant th i rd p lace behindZyuganov and Yeltsin. It is likelythat the elections will go to a sec-ond round between the top two votegetters.

Chicken Little or

Cyclical Trend?

As the elections draw closer, itbecomes increasingly tempting forpoliticians and analysts alike to em-

brace long-term outcomes basedon short-term events. Suchdoomsday predictions or rose-col-ored speculations often fail to con-sider the underlying cyclical natureof history. It is important to notethat every major long-term trendcontains within it several short-term

reactions. Our computer modelscontinue to identify a long-termbearish trend for Russia until 2020when the overall cycle turns bullish.Within this long-term cycle, ourmodels show May of 1996 as aturning point when the economicdecline begins to slow. This stabi-lization should continue until 1998when volatility increases and theslow decline begins to rapidly ac-celerate until it peaks in 2003. AYeltsin victory should continue theshort-term stabilization of the eco-

nomic decline. On the other hand,a Zyuganov victory and its associ-ated policy reversals are unlikely toreceive immediate implementationnor would the cumulative effects besuffered immediately either.

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he March 2nd election vic-tory of the conservativeLiberal/National Party

coalition led by Prime Minister-elect John Howard could have sig-nificant implications for Australiansociety and capital markets. Forbusiness, and particularly smallbusiness, the coalition has prom-ised to get rid of red-tape, free upthe labour market, do away with so-called unfair dismissal laws whichhave been an impediment to em-ployment, and deal with a series ofimposts on business from provi-sional taxation, fringe benefit taxesand compulsory worker superan-nuation mandated by the formerHawke/Keating Labor govern-

ments. Pastoralists and miningcompanies should see somechanges to the existing native titlelegislation which casts doubt ontheir ability to operate in vast inlandand northern areas of the continentas well as a redefinition of restric-tions placed on mining and agricul-ture in some areas proposed forWorld Heritage listing or as Na-tional Parks & Wilderness.

Probably the greatest area foressential change is the nations

costly and inefficient, but nonethe-less popular, Medicare program.Healthcare consumes 11.5% offederal government outlays andthis is rising fast, while the partici-pation rate of individuals taking pri-vate health insurance has fallen be-low 25%. A reversal of these twotrends and genuine reform of thesystem has been promised by thecoalition - although they have hadto avoid being too specific about

their plans in this area - and savingsin government expenditure in thisarea could be significant. Theother major area of federal govern-ment expenditure and responsibil-ity, which the coalition promises todeal with, is the relationship withthe states and territories. The prob-lems are associated with duplica-tion of service delivery and verticalfiscal imbalance where the statesprovide most of the services but theCommonwealth collects the major

part of the tax take.

From a foreign perspective,there would appear to be nochange in foreign investment rules,possibly little change in Australianinterest rates, regardless of thecoalitions desire to see them lower,

and conditions ripe for the stockmarket (which lags behind the underlying value in most commodities) to exhude a greater confidence although local institutionabuying generally lags behind offshore institutions in this respect.

The 40 seat majority obtained bythe new government in the Houseof Representatives should providea powerful mandate for changeThis will be important for the gov

ernment in its dealings with a potentially hostile Senate where acombination of far-left Greens andDemocrats will hold the balance opower between Labor and Liberal/National.

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PRODUCER PRICE INDEX:US wholesale prices fell in Febru-

ary for the first time since last June,indicating that inflation remainssubdued in spite of recent evidenceof faster economic growth. The La-bor Department said the producerprice index for finished gods fell0.2%, partially reversing a gain of0.3% in January. The annual rate ofproducer price inflation dropped to2% from 2.3%. The drop reflectedfalls in food and energy prices.However, even excluding thesevolatile components, the "core" in-dex rose by only a marginal 0.1%,

after a 0.1% decline in January.

The price data showed little evi-dence of inflationary pressures atearlier stages of production thanfinished goods. The price indicesfor intermediate and crude goodsfell 0.4% and 0.7% respectively.

INDUSTRIAL PRODUCTION:US industrial production showed itslargest monthly gain in eight yearsin February. The Federal Reservesaid production rose 1.2% after a

revised decline of 0.4% in January,when activity was depressed bycold weather. Most analysts hadexpected an increase of about0.9%.

The Fed said the production gainwas partly a rebound from disrup-tions caused by severe weather. Arecovery in aircraft production afterthe strike at Boeing last year ac-

counted for nearly a third of the totalrise in output since December.

But there were production gainsin nearly all industrial sectors. Out-put of consumer goods, businessequipment and construction sup-plies were up 1.2% and 2.3% re-spectively from January. Overallproduction was 1.6% higher than inFebruary last year.

RETAIL SALES:The US Com-merce Department said Americanconsumers boosted motor sales inFebruary by 2% and helping liftingoverall retail sales by 0.8%, signal-ing a continued moderate growth inthe US economy.

In February, new car sales,which comprise about one quarterof total retail sales, were the strong-est in six months. Sales of durablegoods rebounded by 1.4%. The de-

partment also revised Januarys0.3% drop in sales to a 0.1% de-cline.

Sales by general merchandisestores rose by 2.3%, the strongestpace in more than a year. but foodstore sales declined by 0.8% andfurniture and appliances, up 0.3%,were relatively weak.

CONSUMER PRICES: Th econsumer price index rose 0.2% inFebruary and by 2.7% on an annual

basis - in line with expectations.Core consumer prices - which ex-clude the volatile components offood and energy - also rose 0.2%

EXISTING HOME SALES: USsales of existing homes rosestrongly in February, despite highermortgage rates, according to theNational Association of Realtors,as the housing industry shook offthe impact of bad weather. Total

sales of existing homes climbed6.5% to a seasonally adjusted an-nual rate of 3.96 million, following arevised January decline of 3.9% to3.72 million. The rebound was sig-nificantly stronger than Wall Streetforecasts of an annual rate of 3.82million.

NEW HOME STARTS: Con-struction starts on new homes and

apartments increased in Februaryto their highest rate in more than ayear, according to the US Com-merce Department. Despite badweather and higher interest rates,total starts rose 3% to a seasonallyadjusted annual rate of 1.49 millionin February - the strongest buildingpace since December 1994, whenthey were running at 1.51 million.

The February pick-up in startswas sharply against Wall Street ex-pectations of a decline to 1.42 mil-

lion a year. The increase followeda 1.5% rise in January starts to arate of 1.45 million units and a de-cline in December of 2.3% to arevised 1.43 million units a year.

The department sharply revisedup its estimate of the level of De-cember starts from a previously re-ported 1.39 million units, indicatingthe housing industry finished 1995on a stronger note than thoughtearlier.

FACTORY ORDERS: TheCommerce Department said neworders for manufactured goodsrose 0.5% in January, reflectingstrength in the technology sector.Officials also released revised fig-ures for December, showing a gainof 1.7% rather than a 1.3% as pre-viously reported.

The figures were considerablystronger than expected, where

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analysts had predicted a fall in or-ders of 0.3%.

Orders rose despite weaknessin the volatile transport sector,which were pulled down by an er-ratic 11.8% decline in aircraft or-ders. Excluding transport, orders

rose 1.5% in January. The strong-est sector - industrial machineryand equipment - registered a gainof 5.7% from December.

The orders figures showed en-couraging strength in capitalgoods. Excluding aircraft and de-fense industries, new orders forcapital goods - a guide to civilianinvestment trends - rose 3.3% inJanuary, reversing falls in preced-ing months. The harsh winterweather in January mainly affected

shipment orders, which fell 0.9%following a 0.7% gain in December.

DEFENSE SPENDING: TheClinton Administration unveiled a1997 military budget, continuing along-term trend of declining de-fense spending. Procurement ofnew weapons would take the big-gest cut out of the Pentagonbudget. Last year, the Pentagonhad said such spending would in-crease this year, but those in-creases have been delayed by a

year, because of pressure to re-duce the federal deficit.

The Pentagon said its spendingas a share of GDP would drop to3.2% in this budget, the lowestsince 1938. As recently as the1980s, this figure was 6%. Al-though procurement spendingwould fall in 1997 to $38.9 billionfrom this years $42.3 billion, thedecline would only be temporary.By 2001 - the year before the Presi-dent and Congress have agreed to

balance the federal budget - itwould have jumped 40% from cur-rent levels, to $a60 billion. Seniormilitary officials say such spendingis essential to keep US forces up todate.

OUTPUT GROWTH: The USeconomy grew modestly in Januaryand February without putting up-ward pressure on inflation, accord-ing to the Federal Reserve in its

"beige book" analysis of regionaltrends.

The report said, " Over half thedistricts cite moderate economicgrowth or continuing solid levels ofeconomic activity. Most of the oth-ers mention recent improvements,

largely reflecting rebounds fromweather related slowdowns earlierin the year".

However, the Feds regionalbanks saw little evidence of infla-tionary pressures. Retail priceswere rising slightly if at all" Com-modity prices were "steady, stabi-lizing, or increasing very little.wages were "increasing at a mod-est pace". Retail sales were weaknearly everywhere in January butmost areas said activity picked up

last month.

Manufacturing was mixed but"fairly flat on average". More thanhalf the districts reported gains insome industries or sub-regions, butthe Boston, St. Louis, Minneapolis,Kansas City and Dallas districtssaid output was either flat or grow-ing more slowly than last year.

LEADING INDICATORS: Se-vere winter weather contributed toa 0.5% fall in the US index of lead-

ing indicators in January to its low-est level in more than two years.The Conference Board, the NewYork business analysis group thatcompiles the figures, said the de-cline largely reflected a sharp fall inthe average factory working week,owing to blizzard on the east coast.

Other sources of weakness in-cluded declining building permits, afall in consumer confidence andhigher claims for state unemploy-ment insurance.

The January drop followed again of 0;.2% in December and adecline of 0.2% in November. Theindex is meant to predict economictrends six to nine months in ad-vance, but many analysts regard itas a indicator of current conditions..The index has fallen in four of thepast six months.

CONSUMER CONFIDENCEThe Conference Board, a NewYork business analysis group saidUS consumer confidence heldsteady in March, after a sharp im-provement in February. The indexfell marginally to 97.7% from 98 inFebruary. This was in line with

readings late last year and welabove the trough of 88.4% in January when severe weather and othedistortions depressed other economic activity. Confidence readings of about 100 typically indicatesolid economic growth.

The survey indicated consumerswere generally "quite positiveabout business conditions. However, Mr. Edgar Fielder, economiccounselor to the board, said therewas evidence of "uneasiness abou

the job market".

TRADE SURPLUS: Britain recorded its first trade surplus for twoand a half years with the rest of theEuropean Union in December afteimports from the Continent felsharply. The surprise improvemencame amid fresh signs that demand is faltering on both sides othe Channel, because of lower than

expected growth in Europe.

Imports of consumer goods andcars have risen slightly in recenmonths. However, manufacturingconfidence may be weakeningwith imports of investment goodsused by manufacturers fallingThese types of imports showed thesharpest quarterly fall in the lasthree months of 1995 for five yearsImports of German goods seem tobe particularly affected.

The value of exports in December was a seasonally adjusted0.5% lower than in November, according to the CSO office. Measured on a three monthly basis, involume terms - a better guide totrend - exports were 1.5% lower inbetween the third and fourth quarters.

The weakness was not spreadequally: sales to Germany fel

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3.3%, while exports to Belgium,Holland and Luxembourg are run-ning at record levels. This patchyperformance left exports fallingmore slowly than imports, resultingin a BP56 million surplus in Tradewith European countries, against aBP118 million deficit in November.

This surplus helped bring theoverall trade deficit with the wholeworld to BP557 million in Decem-ber, unchanged from November.

INFLATION:The annual rate ofinflation, which excludes mortgageinterest payments, rose to 2.9% inFebruary, from 2.8% in January.This occurred even though the"headline" rate - which includes allitems - fell to its lowest level for 15months because of lower mortgage

costs and sharp falls in petrol andtobacco prices. However, a Con-federation of British Industry surveyshowed that demand for manufac-turing goods was at its weakestlevel for more than two years.

The CBI warned that althoughfactories are still increasing output,it fears some companies may beexcessively optimistic - particularlysince export markets are weaken-ing.

BALANCE OF PAYMENTS:Britains balance of paymentsswung further into deficit in the finalquarter of last year as transfer pay-ments to European Union institu-tions reached record levels, ac-cording to official figures.

The current account was in defi-cit by BP1.8 billion in the fourthquarter of last year, according tothe CSO. This was less than theBP2.1 billion deficit recorded in thethird quarter, because of a recovery

in income from UK companies in-vestments overseas, which re-corded its highest surplus for a yearand a half.

But the figure took the deficit for1995 as a whole to BP6.7 billion.This was more than three times asbig as the deficit in 1994 - but stilllittle more than half the size of theBP11 billion deficit recorded in1993. Revisions to earlier data also

provided a gloomier quarterly pic-ture of the balance of paymentsthroughout 1995 than earlier fig-ures had suggested.

The CSO increased its estimateof the deficit in both the second andthird quarters of last year by about

a third because of lower investmentincome from abroad and highertransfer to the EU. The UKs pay-ments to the EU institutions - suchas the agricultural fund, social fundand regional development fund - farexceeded receipts from the EUYlast year. The payments deficit al-most doubled from BP2.1 billion in1994 to BP4.1 billion in 1995.

The deterioration in the visibletrade balance reflected the sharpslowdown abroad which hit ex-

ports. Services income bucked thetrend, however. Net income fromservices rose from BP4.8 billion in1994 to a surplus of BP%.7 billionlast year, the highest since 1987.

The total invisible balance -which includes services, invest-ment income and transfers -slipped from BP1.4 billion in thethird quarter to BP0.9 billion in thefourth quarter, its lowest for twoyears.

Direct investment overseas byUK companies rose to a recordBP24 billion in 1995. Direct invest-ment in the UK by overseas com-panies also rose to record levels. Ittripled between the third and fourthquarters of the year - largely reflect-ing overseas company takeoversof UK companies.

MONEY SUPPLY:According toofficial figures, growth in moneysupply eased in February for thefirst time since last autumn, but

lending by banks and building so-cieties rose at its fastest rate foralmost five years.

The Bank of England ( the UKcentral bank) said that M$, thebroad measure of the amount ofmoney circulating in the economy,grew at an annual rate of 9.9% inFebruary, down from 10.3% inJanuary. Growth in the money sup-ply has accelerated rapidly since

the beginning of last year to exceedthe governments monitoring rangeof 3-9%. Lending by banks andbuilding societies grew by 9.5% inthe 12 months to February.

MANUFACTURING INVEST-MENT: Fears for the long-term

health of manufacturing industrywere eased when official figuresconfirmed that the drop in factoryinvestment last year was not asgreat as suspected. Higher thanexpected spending on engineeringmachinery and on investment in thechemical sector meant that govern-ment statisticians revised down es-timates of the overall decline in in-vestment in the fourth quarter oflast year. Seasonally adjustedmanufacturing investment in thefourth quarter was 5% lower than in

the third quarter at constant prices,the Central Statistical Office (CSO)said. This was better than the pic-ture presented by earlier figureswhich had startled City of Londoneconomists by showing a 9% dropin investment.

TOURIST INDUSTRY:A weakpound and the Northern Irelandcease-fire helped the British touristindustry notch up a record year in1995, with visitor spending up by

about 18%. Mrs. Virginia Bottomlyhailed the figures as evidence thattourism is now more important thanNorth Sea oil and the financial serv-ices industry to the UK economy.

But many in the tourist industryremain concerned that Britain isfailing to increase its market shareof world tourism, as they believemore government sounding over-seas is vital. Figures from the CSOshow that visitor spending in the UKin 1995 was about BP11.8 billion

($18.2 billion) up from BP10 billionin 1994.

The annual figures also show anincrease of some 12% in the num-ber of visitors to Britain - the largestjump in recent years. The totalnumber of visitors was about 23.5million, up from 21 million.

NORTH SEA OUTPUT: The an-nual industry review by Wood

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Mackenzie, the Edinburgh basedenergy-consultants says UK oilproduction is on track to set a re-cord of 2.71 million barrels a daythis year.

The forecast represents a 5%increase on last years average

output of 2.58 million b/d, which inturn amounted to a 3% increaseover 1994. The upward trend inNorth Sea production is set to con-tinue for some years, says WoodMackenzie, with output of as muchas 3 million b/d towards the end ofthe decade.

The growth in UK production ispart of a general rise in North Seaoutput. Total production from Nor-way, the UK, Denmark and theNetherlands this year is expected

to average around 6 million B/d, a9% rise over 1995.

The Norwegian government willbe the largest producer, accountingfor about a third of total North Seaproduction. Statoil, the Norwegianstate oil company will be the sec-ond largest North Sea producer thisyear, followed by British Petroleum.

The consultants say the ex-pected rise in 1996 production inthe UK will be the result of a less

extensive offshore maintenancesession this year and the start-up of15 new fields.

GDP: The governments eco-nomic planning agency saidstronger than expected consumerspending lifted Japans gross do-mestic product by an annualized3.6% in the final quarter of 1995,

the fastest growth for five years.The result confirms the govern-ments assessment that Japan isrecovering from there longest re-cession since the 1930s.

GDP rose 0.9% in the final quar-ter from the three months to Sep-tember, an acceleration on 1.6%growth in the second and thirdquarters. But even after a betterthan expected final three months,

the Japanese economy grew byjust 0.9% last calendar year, thethird year in which it has grown lessthan 1%.

Mr. Makato Koayshi , theagencys vice-minister, said theeconomy was now on track to

achieve its official target of 1.2%growth in the fiscal year ending inMarch.

Domestic demand rose by 1.5%from the third to the final quarter, byfar the largest contributor to the0.9% GDP growth over that period.Within this, private consumptionrose by 0.4% quarter on quarter,led by spending on car and, per-sonal computers.

Government spending from a re-

cord Y14,220 billion ($135 billion)public works package announcedlast September underpinned muchof the growth in the final quarter.Public investment contributed0.6% to quarter on quarter growth.

IMPORT GROWTH CUTSTRADE SURPLUS: Formerly ex-port-obsessed Japan reported agap of just $6.1 billion in February,slightly above the market estimatesand sharply down on the $11.3 bil-

lion of the same month last year.Imports grew 16.8%, according topreliminary figures from the financeministry. It was the 36th consecu-tive month of increased importsand took place despite the weak-ness of consumer demand for mostof that period.

Exports dropped by 3.3% in the12 months to February, the first fallin three years, attributable to a one-off correction from unusually highoverseas sales in February last

year. This was when Japanese ex-porters were rushing to catch up ondeliveries delayed by the JanuaryKobe earthquake.

But compared with January thisyear, overseas sales rose by thesame amount, 3.3%, a pace ofgrowth which reflects weakness ofdemand in the US and Europe.

Japans surplus with the USdropped 30% to $3.4 billion. Thesurplus with other Asian countrieson a long-term rising trend, alsodropped by almost 39% to $3.8 billion, the second monthly decline.

CORPORATE SPENDING

Capital spending by Japanesecompanies increased for the thirdsuccessive quarter in the last threemonths of 1995, providing furtheevidence of the countrys graduaeconomic recovery.. Corporate investment rose 5.7% compared withthe same period a year earlier, according to a survey published bythe ministry of finance, with the increase especially marked amongmanufacturers.

A survey by the Japan Develop

ment Bank suggested that corporate spending plans for 1996 pointo continued recovery in investment. Private sector capital formation in the financial year beginningin March is expected to rise by0.7%, the second successive yeaof growth. The figure is lower thanthe current years 5.7% projectedincrease, but a bank official said theforecast for next year reflected afamiliar caution on the part of companies.

HOUSEHOLD DEBT:The average salaried workers householdborrowed 11.4% more in 1995 thanthe previous year, the third year ihas risen by more than 10%, according to the governments Management and Coord inat ionAgency. Nearly all these loans 93% - were taken out to buy property rather than consumer goodsThe average household had Y12.6million ($120,000) savings - a record high - and Y4.5 million of borrowings .

Japans salaried workers preferred to save rather than spendmost of their spare cash. Their average savings last year rose by2.2%, faster than the 1.6% averagerise in income.

Savings had dropped in 1994 fothe first time in three decades, holding out hopes for a recovery in con

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sumer spending, but this has yet togain impetus.

INDUSTRIAL OUTPUT: TheMinistry of International Trade andIndustry (MITI) reduced its Januaryproduction estimate to zero, from0.5% month-on-month growth. It

said corporate shipments fell 0.9%in January, instead of 0.7% as ear-lier estimated, while stocks of un-sold goods and materials rose by0.8% instead of the preliminary0.6% increase.

MITI did not change its forecastthat industrial output would rise by1.5% in February and then fall backsharply by 5.3% in March, as com-panies sought to trim stocks afteroverproducing early in the year.

The forecast decline wouldeliminate four months of output in-crease and bring production vol-umes back to the level of last Sep-tember. For the first quarter toMarch, MITI expects a marginal0.2% rise in output compared withthe previous quarter.

SURVEY REAFFIRMS SLOWRECOVERY: The "tankan" survey,which forecasts Japans short-termeconomic outlook based on re-sponses from some 9,000 compa-

nies, reaffirmed forecasts for asluggish rebound from four years ofslow economic growth and less-ened expectations of higher inter-est rates. The survey is conductedby the Bank of Japan.

The manufacturing businessconditions index, the leading indi-cator that reflects the general sen-timent of Japans major producers,was minus 12. That was up fromminus 14 recorded in the last sur-vey in November, but below expec-

tations of minus seven. The non-manufacturing sector data im-proved to minus 18 from minus 22.

The survey portrayed an econ-omy in transition, as long-term cor-porate overhaul continues to dampconsumer spending. Profits for theyear ending March 31, are ex-pected to rise by 11% and 3.2%among manufacturers and non-manufacturers, respectively, in part

because the yens relative declineagainst the dollar. But the surveysuggested that Japanese workersarent getting higher wages. In-stead, the survey showed, compa-nies are continuing to invest in newplants and equipment overseas.

The outlook for the retail industrydeteriorated, as that sectors indexslipped to minus 16 from minus 14in November. The lingering reces-sion has forced the industry intoaggressive sales and cost cutting,which have proved especially pain-ful for the countrys departmentstores.

Sluggish retail sales have re-sulted in persistently high invento-ries, according to the tankan.

EASING OF CURRENCYCURBS: Japans finance ministryintends by the end of March to easesome curbs on currency transac-tions by security houses and othercompanies with foreign busi-nesses. Senior officials said theyaccepted in principle proposals bya working party of the ruling coali-tion to allow companies to "net out"foreign exchange transactions be-tween different subsidiaries, to re-duce the number of transactionsnecessary with authorized foreign

exchange banks.The coalition called for an end to

the present ceiling of Y100 millionallowed for such offset deals andan end to the present requirementthat companies must set official ap-proval for foreign exchange trans-actions carried out two years afterthe original deal was struck.

Economists in Tokyo said thesewere minor technical changes butnevertheless significant as the lat-est in a series of steps to encour-

age freer trade in the yen.

MONEY SUPPLY: JapansBroad M2 money supply rose 2.8%in February from a year earlier, af-ter expanding 3.1% the previousmonth, according to the Bank ofJapan. M2 is the broadest measureof total money supply, comprisingcash in circulation, deposits in bankaccounts as well as quasi-money,

including time deposits and treas-ury bills.

M1 or cash in circulation rose16% in February after a revised14.7% in january. Preliminary datahad shown a 14.8% rise in M1 forJanuary.

HEALTH INSURANCE SYS-TEM: Germanys health insurancesystem ended last year with aDM2.4 billion surplus in 1994,prompting fears that contributionsmay have to rise unless savings aremade. Mr. Horst Seehofer, thehealth minister, warned that contri-

butions, divided equally betweenemployers and employees. couldjump by one percentage point to14.4% of earnings unless agree-ment is reached between the fed-eral government and the Lander(states) on disputed plans to limitthe costs of hospital care.

Last years deficit was lowerthan the DM10 billion-12 billion re-cently forecast by health insuranceofficials. Mr. Seehofer said themove into deficit slowed markedly

in the final three months, with the1995 shortfall in western Germanydropping to DM4.15 billion fromDM5.8 billion at the end of Septem-ber. However, the deficit in easternGermany grew to DM2.85 billionfrom DM1.7 billion in the first threequarters.

GROSS DOMESTIC PROD-UCT: German GDP contracted by0.5% during the fourth quarter lastyear according to figures from theFederal Statistics Office. The Ger-

man economy grew 1.9% last year.Output rose 1.6% in west Germanyand 5.6% in the east, a significantslowdown.

The output data were widely dis-counted in financial markets, al-though several GDP componentsappeared to cause some surprise.These included the strong fall ininventory accumulation and a risein private consumption. Some

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economists were puzzled by the3.4% rise in exports from the pre-vious quarter, and the 5.5% riseyear-on-year.

UNEMPLOYMENT - ONE INNINE OUT OF WORK: Germanysunemployment rate in February

soared to 11.1% of the work forcefrom 10.8% in January, logging apost World War II record for thesecond month in a row. The joblesstotal rose to seasonally adjusted4.27 million from 4.16 million; theseasonally adjusted increase was107,000, almost double the 56,000rise in January. The government

said unusually cold weather and astagnant economy spurred the in-crease, but it predicted improve-ment by midyear.

Eastern Germany was espe-cially hard hit, with 1.31 mill ion peo-ple or 17.5% of the labor force out

of work. In western Germany,where 2.96 million were jobless,the unemployment rate was 9.6%.Mr. Bernhard Jagoda, the labor of-fice president, said this years re-cord unemployment reflected theloss of 262,000 construction jobs inJanuary and February. Althoughthe hard winter was partly to blame,

companies were also reacting to alack of orders.

GOVERNMENT SPENDINGCAP: Forecasts that the Germanbudget deficit this year - predictedat DM60 billion - would in fact beDM20 billion higher have prompted

fears that Mr. Theo Waigel, the finance minister, will have to announce a cap on governmenspending because of lower taxrevenues.

Press reports suggested thespending restrictions would only beintroduced after three state elec

When Theo Waigel took over from Gerhard Stoltenberg as Finance Minister in April 1989 even the oppositionnamed him an "intelligent guy." Today, seven years later the picture has changed. He has managered to breakseveral records as far as the budget is concerned. Even the BDI-President, Mr. Hans-O. Henkel expressed thatMr. Waigels activities had been inadequate.

What did he do? He reduced taxes on Salt and chewing tabacco, however, since 1991 he has increased othertaxes seventeen times:

During his period in office he has accumulated almost as much on debt as his twelve predecessors combined.He has increased the public debt by nearly 100%, from DM491 billion to DM822 billion. The interest paymentshave increased from formerly DM32 billion to DM99 billion as of today. Currently, about 21% of the tax incomehas to be spent on interest payments.

To summarize the political achievements so far:

Highest tax burden everAlmost highest unemploymentCompanies are moving offshoreMaastricht shall help?

Recently asked on his politics, Waigel said about Waigel, "I could say good-bye anytime and start as a lawyer.."Good for him.

1/1/91 Fuel tax1/7/91 Solidaritatszuschlag (till 30/6/92)1/7/91 Fuel tax1/7/91 Fuel tax on heating oil1/7/91 Fuel tax on natural gas1/7/91 Insurance tax1/3/92 Car tax1/1/93 Tax on tabacco1/1/93 Value added tax

1/7/93 Withholding tax on deposits1/1/94 Insurance tax1/1/94 Car tax for diesel cars1/1/94 Fuel tax1/1/94 Coal Pfenning1/95 Solidaritatszuschlag/1/95 Insurance tax1/1/95 Wealth tax

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tions had taken place on March 24,the next important date in Ger-manys political calendar. How-ever, the finance ministry insistedthat no decision had been takenand that the final decision had"nothing to do with the elections".

Fears about lower tax revenuescaused Mr. Waigel to demand lastOctober that all government expen-diture over DM1 million be clearedwith his ministry. That spendingcap, however, ran out on Decem-ber 31.

TRADE SURPLUS: Accordingto the federal statistics office, vis-ible exports fell to DM61.6 billion inDecember last year from DM65.5billion in November and were 2.7%below the DM63.3 billion of Decem-

ber 1994.

Imports declined to DM54.6 bil-lion in December, from DM55.3 bil-lion the previous month and were6.9% lower than the DM58.6 billionof December 1994. As a result, De-cembers trade surplus was lowerthan Novembers DM10.2 billionbut higher than the DM4.7 billion ofthe previous December.

Germanys visible trade surplusincreased to DM93.4 billion last

year from DM73.3 billion in 1994 asexports rose 5.4% to DM727.6 bil-lion from DM690.6 billion and im-ports advanced 2.7% to DM634.2billion from DM617.3 billion.

After deducting net investmentincome together with the balance oftrade in services and net transfers,Germanys current account bal-ance of payments recorded a pro-visional DM3.5 billion deficit in De-cember after a DM4 billion deficit inDecember 1994. For last year as a

whole, the current account deficitfell to DM24.8 billion from DM34.7billion in 1994.

Statistics office officials said theexport downturn was a delayed re-sponse to last years sharp in-crease in the value of the D-Mark.It cast doubt on government hopesthat exports would support Germaneconomic activity this year at a time

of weak consumer demand and in-vestment.

PRODUCER PRICES: Germanproducer prices rose 0.1% i Febru-ary from January, but were down0.2% year-on-year.

NEW ORDERS:New orders forplant and machinery in Germanyfell 6% in price-adjusted terms inFebruary from a year earlier, saidthe VDMA industry association . Itblamed weakness in domestic in-vestment.

INFLATION: Germanys con-sumer price inflation crept up to anannual 1.5% in March from 1.4% inFebruary, the German federal sta-tistics office said. Prices in westernGermany rose 0.1%, after a 0.5%

rise in February. The office alsoreleased final data for February in-flation showing prices across thewhole country rose 0.5% fromJanuary and 1.6% from a year ear-lier.

INTEREST RATES: The Bankof France trimmed its two key inter-est rates by 0.10 of a percentage

point, in a furthering of softening ofmonetary policy induced by theslowdown in the economy. The re-ductions, which bring the centralbanks intervention base rate to3.8% and its repurchase rate to5.5%, may increase the govern-ments impatience to see the com-mercial banks pass on the benefitof the Bank of France cuts in lowerlending rate s to their own custom-ers. The banks have proved reluc-tant to do this , claiming the needfor higher lending margins to im-

prove their poor profitability. SomeFrench MPs have the criticized thegovernment as well as the Bank ofFrance, for slow, piecemeal actionto revive the economy.

CONSUMER PRICES:Frances consumer price index inFebruary provisionally rose 0.4%from the previous month, and 2%from a year earlier, according to thenational statistics institute. Exclud-ing energy prices, which rose 0.7%

from January and 1.9% from a yearearlier.

The prices of manufacturedproducts rose 0.5% from the pre-vious month due to the 1.5% in-crease in clothing and shoe prices.Services sector prices rose 0.2%,

and 3.2% year-on-year.

PUBLIC SPENDING FREEZE:The French government an-nounced a FFr20 billion ($4 billion)freeze in budgets allocated acrossall ministries for 196 as part of itsplan to maintain public spendingtargets. Mr. Jean Arthius, econom-ics minister, said the freeze wouldcover all departments but would notaffect civil servants salaries, socialexpenditure or debt payments. Hesaid it was imposed to maintain the

budget deficit for 1996 at belowFFr287 billion. The governmentalso indicated that tax receipts for1995 would fall by 0.4% from thelevel FFr296 billion collected in1994. It said this reflected a sub-stantial increase in tax deductions,including those for professional ex-penses and household help. Bycontrast, value-added tax receiptsrose by 2.6% last year before theeffects of the 2% increase in thetax.

INDUSTRIAL PRODUCTION:French industrial production fell0.7% in December after rising arevised 0.5% in November.

The decline in French industrialactivity has stopped in recentmonths and a pick up in productioncan be expected in the secondquarter, but prices should remainon a downward trend, according tothe statistics office, Insee. The bal-ance between the number o indus-trialists reporting a decline in output

and those experiencing an in-crease during the previous threemonths narrowed 10 percentagepoints in March from 11 the monthbefore. The difference betweenthose expecting a decline in outputand those expecting an increasefell to 23 points from 32.

CONSUMER SPENDING:French consumer spending wasunchanged in February, after a re-

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vised 5.0% rise in January com-pared with December, according toFrances national statistics insti-tute, Insee. The February figuresare encouraging and suggest thenFrench economy will avoid a reces-sion.

RETAIL SALES: French retailsales fell a provisional 4.7% in De-cember, following a rise of 4.4% inNovember, according to figuresfrom Insee. December sales wereflat compared with the average ofthe previous three months.

CURRENT ACCOUNT: Francevirtually doubled its current accountsurplus last year to reach FFr84.5billion, an increase of nearly FFr40billion on 1994, according to thefinance ministry. The trade surplus

in goods rose to more than FFr50billion, while that of services stayedsteady at around FFr74 billion.

The balance on investment in-come was reduced to a deficit ofFFr31 billion, though French com-panies, anxious to reduce theirdebt, cut their direct investmentabroad from FFr106 billion in 1994to FFr92.5 billion last year, while atthe same time selling off foreigncompanies worth FFr44.6 billion.However, foreign investors main-

tained their investments in Franceat around FFr60 billion last year.

Public financial transfers, tradi-tionally in deficit because France isa net contributor to the EuropeanUnion budget and a large providerof foreign development aid, re-mained in deficit at FFr32.5 billion,but this was FFr12 billion smallerthan in 1994.

BORROWING CUTS: Can-

adas borrowing requirement forthe 1997-98 fiscal year will be thesmallest in almost three decadesand the lowest among the Group ofSeven leading industrial countriesrelative to gross domestic product,according to finance minister PaulMartin in his annual budget speech.

The budget contained only ahandful of minor tax changes. ButMr. Martin launched an overhaul ofCanadas social security system,notably the scheme that has guar-anteed generous pensions forevery Canadian over 65. The pen-sion reforms, in the face of an aging

population, mean high income retir-ees - or about 9% of the total - willno longer be eligible for govern-ment pensions after 2001.

Mr. Martin predicted he couldeasily meet his target of bringingthe budget deficit down to C$24.3billion ($US17.7 billion) or 3% ofGDP, in the fiscal year to the end ofMarch 1997. The deficit wouldshrink further to C$17 billion, or 2%of GDP, in 1997-98. The ministerpledged to keep moving towards a

balanced budget, but said that "wewill do so in a way that is measured,deliberate and responsible."

The borrowing requirement isexpected to fall to C$6 billion, or0.7% of GDP, in 1997-98 fromC$30 billion, or 4.2% of GDP, 1n1993-94. Aside from borrowing, therest of the budget deficit is to be metby non-budgetary transactions, in-cluding use of pension fund sur-pluses. The deficit will be broughtdown in the coming fiscal year

mainly by a cut in transfer pay-ments to the ten provinces forhealth, education and social secu-rity, lower business subsidies, anddefense cuts.

BUDGET DEFICIT: Australiaaims at fiscal balance by 1997-98,a year later then planned under the

ousted Labor government, after fig-ures released by the new Liberal-National ruling coalition showed itfaced an underlying federal budgetdeficit of A$7.64 billion in the 1996-97 year.

The treasury estimate of thedeficit is struck before asset saleproceeds, and before spendingpledges made during the electioncampaign. The figures contrast

sharply with small surplus predicted by Mr. Ralph Willis, then federal treasurer, in last Mays budgespeech. Mr. Peter Costello, his successor, said the governmenplanned to redress the balance bytaking A$4 billion out of the budgein 1996-97 and a similar amount in

the next year, "overwhelminglythrough expenditure reductions".

ECONOMIC GROWTH:Australias economy continued to grow aaround 0.5%, seasonally adjustedduring the final quarter of 1995bringing the annualized growth fothe year to about 3.1%. The finaquarter result marks a considerableslowdown from the 1.65 rise in reagross domestic product seen during the September quarter, whenyear-on-year growth rate was

3.3%.

But it was still a slightly strongeperformance than private -sectoeconomists had been expectingwith some cautioning the annuagrowth rate could slip below 3%.

BUSINESS CONFIDENCEPOLL: According to the latest quarterly industrial trends survey by theAustralian Chamber of Commerceand Industry and Westpac bankThe ACCI-Westpac survey is one

of the first pieces of statistical datasince the change of government onMarch 2, which brought to an end13 years of Labor rule. It found thamanufacturing activity remainedweak in the first quarter, with industry reporting falling output andlower orders. Capacity utilizationalso declined.

By contrast, most manufacturerssaid they were expecting improvedcondit ions over the next s ixmonths, and expected to see new

orders and output rise in the second quarter. In the first quartersome 34a5 of the respondents predicted improved business in sixmonths, compared with only 8% inthe final quarter of 1995.

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