1996 Issue # 6

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ill Clinton seems to have alot of nicknames surfacingfrom his past but a new

one might be just as appropriate -"Mr. Alley Ooops." The recent dis-covery that over 400 FBI personalfiles have been requested by theWhite House on Republicans both

in and out of office, is another in along string of "Ooops" we made asilly mistake incidents. The pass-port inspection of Republicans wasanother "Ooops" we didnt mean itas was the case with Whitewater,"Ooops we lost money and we hadno idea what was going on" and, ofcourse, Hillarys "Ooops" I have noidea how the billing records got intoWhite House. And we cannot for-get the "Ooops I Didnt inhale" ex-cuse.

Partisan politics aside, if Clintonis telling the truth that all these mis-takes, and many more, are simplyinnocent events that hold no maliceor intent, then we must ask our-selves - are the Clintons mentallycapable of being in office? Do theClintons realize the responsibilityof public office which means ac-countability on the bottom line? Isincompetence an acceptable ex-

cuse for the President of the UnitedStates?

I seriously doubt that so manyaccusations would have been pos-sible against Carter, Mondale orDukakis. There was no one in theRepublican camp who ever daredto suggest that any of these menwere possibly dishonest, corrupt orcompletely incompetent. Yet thereis so much smoke surrounding theClintons that the laws of probabilityseem to suggest that all these

things are part of a broader picturethat paints a dark and sinister char-acter perspective.

We must keep in mind that Wa-tergate never proved or evenhinted that Nixon ordered the politi-cal action. Watergate was simplyabout Nixons cover-up thatamounted to obstruction of justice.Even the Iran-Contra affair boileddown to charges of lying to Con-gress. This seems to be a seriousquestion that is not being con-

fronted in the media. There is areasonable chance that at the veryleast Hillary was involved in an ob-struction of justice with both Travel-gate and Whitewater. After all, theWhite House only came clean onthe FBI files within a few hours priorto a Congressional vote on whetheror not the White House would beheld in contempt of Congress forrefusing to hand over documents.This FBI list suddenly appeared as

Issue #6 June 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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part of the Travelgate affair. TheRepublicans were shocked - no-body was even looking for nor ex-pected this time bomb. One cannow only speculate that if this waspreviously withheld from Congresson the premise of "Executive Privi-lege," then there could be far worse

things that lie ahead in the remain-ing 2,000 pages that are still beingwithheld.

The troubles for Bill and HillaryClinton are only starting to get offthe ground. There are rumors aboutthe Clintons being involved in thedrug trade. Perhaps this soundsreally off-the-wall, but there is somesmoke here as well. After all, Clin-ton did pardon one of his buddiesin Arkansas who was convicted ofdealing in drugs in a very big way.

It would appear, that drugs fromColumbia were arriving in Arkan-

sas finding shelter in the statesbonded warehouse. Of course thismight be just another "Ooops Ididnt know what was going on"defense, but why give a pardon toa CONVICTED drug dealer?

There are simply too many ques-

tions that are being answered with"Ooops, it was an innocent mis-take." It is not logical to requestprivate FBI files on all your politicalopponents and then claim "but no-body looked at them." It rings thesame bell as "but I didnt inhale."

If Clinton is honestly this incom-petent, then he should resign be-fore the elections and allow Gore tohead the Democratic Party. Gorecould then grant him a pardon be-fore the elections or just after the

elections even if he lost. If the heatstarts to burn too close to the White

House this summer, dont be sur-prised if this far-out scenario un-folds.

Clinton is not JFK. He isnt evenas honorable as Jimmy Carter. Theindependent counsel will be theone who could make or break this

conspiracy and at this point thereseems to be one. If McDougal cancasually remark to the press that heexpects a pardon, then so do therest of the staff who simply cannotremember what they previously dideven under oath. There are toomany memories that have selec-tively vanished. Too many ques-tions left unanswered. Maybe thesmoking gun hasnt been found notbecause there isnt one, but be-cause there is just too muchsmoke!

Providing Economic & Market Analysis Worldwide

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he Japanese economy isstarting to improve tosome degree, but it re-

mains far from what could betermed a major recovery. Thequestion in Japan is more aboutrestructuring in both the financialaspects as well as industrial sec-tors. The economic decline that hasdeveloped since December 1989

has been a major force that ulti-mately is reshaping the very waybusiness and the economy itselfoperates.

Major losses in Japan are stillquite prevalent. Much has indeedbeen written off by companies whowere fortunate enough to havesome offsetting profits. However,there are still numerous positionsthat await the cold light of day andthese will continue to drip out slowlyas time goes on.

The "intelligent" Japanese Mafiais also being forced into restructur-ing. This branch of the Mafia inJapan are known as the "intelli-gent" group because they are notinvolved in prostitution or drugs -just corporate blackmail. Besidesshowing up at construction jobs,one of the biggest scams has beento threaten Japanese corporationswith disrupting their annual share-holders meeting. The mob wouldstand up and ask some very em-

barrassing questions that wouldcause the company to lose face.Naturally, the company would re-ceive advance notice that theywould be attending the meetingcausing management serious anxi-ety attacks.

Nevertheless, Japanese corpo-rations are fighting back. This June27th will be a monumental day inJapan. The vast majority of share-

holders meetings will all be held onthe same day this year. It is anattempt by corporate Japan tobreak the back of the "intelligent"

Japanese Mafia since they will beunable to attend all the meetings

simultaneously. This will be a reafirst in Japan and many are waitingto see if the outcome is a victory oa huge embarrassment for the cor

porate world in Japan.

Copyright PEI June 1996 All Rights Reserved

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he Balance of Powerwithin Europe and the Mid-dle East and the balance to

stay in power seems to be the num-ber one skill needed as we ap-proach the second half of this politi-

cally tumultuous year. Tensionshave erupted between the UK andthe European Community struc-tures and fellow members. Politicalelections have been inconclusive inthe Czech Republic, similar to re-sults elsewhere in the world. Turk-ish-Greek territorial disputes havearisen again and tension in the UNbuffer zone in Cyprus increasedwith the shooting of a Greek-Cyp-riot soldier by Turkish troops whilewithin Turkey, the coalition govern-ment is tottering near collapse.

Arab leaders plan to meet inCairo on the 21st of June to forge acommon approach to Israels newlyelected Prime Minister, BinyaminNetanyahu with neither side ex-pected to have much flexibility tooffer. Iran and the Gulf states, in-cluding Saudi Arabia, remain on acollision course. While the threat tosecurity from Iraq is seen to becontained, the threat from Iran isseen to grow as Teheran improvesrelationships with Russia and ne-

gotiates to import Russian technol-ogy. US and British agencies havebeen warning their respective gov-ernments of Iranian sponsorship of"terrorism" in Egypt, Bahrain, Alge-ria, Saudi Arabia and Kuwaitbacked by a $100 million budget.The United Arab Emirates has $6Billion to spend on war planesspecifying a range to reach targetsaround Teheran and balancingthis prize contract against Western

assurances of military and politicalsupport when needed. Other Gulfcountries appear likely to purchaseadditional arms as rising oil pricesreduce their deficits.

Within Russia itself, the extraor-dinary efforts by Yeltsin to be re-elected are only leading to furtherturmoil no matter who takes thepresidency. The almost comic ef-forts to achieve a cease-fire inChechnya on paper orchestratedfor the predominantly pro-Yeltsin

media were followed by the dra-matic forced transfer of Rbs 5000billion from the Russian centralbank to the federal budget to payfor election promises only a fewhours after the IMF disbursementapproval of its last loan tranche($330 million) before the June 16thelections.

The Prime MinistersBalancing Act.

The start of the talks in Ulster toreach a settlement of Northern Ire-lands problems were marred bythe exclusion of the Sinn Fein dele-gation on the one hand and thethreat by the Unionist delegationsto walk out because of their per-ceptions of Mr. George Mitchell -the former US senator, appointedas chairman of the talks. John Ma-

jor, the British prime minister, ap-pealed for reason and flexibilityfrom all parties to get the talks mov-ing. This appeal might well puzzlesenior European Commission offi-cials and European ministerial col-leagues who are furious at Britainsblocking tactics since Mr. Major an-nounced his program of non co-operation in Europe over the banon British beef exports. While thereis hardly a country who will import

British beef anyway since the BSEepidemic broke out several yearsago - it is the principle of the thing.Just like in Northern Ireland.

The Chancellors Balanc-ing Act.

The UK Chancellor, KennethClarke, reduced interest rates from6% to 5.75% in May balancing theinflation-concerned stance of theBank of England against the gov-ernments political agenda. The

Banks view that the March quarterpercent cut was insurance againsta short term weakening of theeconomy and should not need to berepeated was obviously brushedaside as the Chancellor pointed toeasing cost pressures to justify themove. His stated aim is to narrowthe gap to achieve the same realinterest rates as France and Ger-many. This gives a target of 5 per-cent. Supporting his action was thefall in industrys cost of fuel and rawmaterials last month prompting

manufacturers to cut their prices forthe first time in four years. Othercommentators point to the stronglyrising trend in consumer credit andspending together with the rise inaverage earnings growth. Figuresreleased by the Office for NationalStatistics revealed falling oil pricescaused the 0.5 percent seasonallyadjusted fall in industry input costs,more than halving the annual rateof increase from 2.4 percent to 1percent. While the market feelsnow that odds have shortened onfurther interest rate cuts, rising oilprices in the second half of this yearwill give the Bank of England justi-fication for saying "I told you so!".


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t is interesting to note howBoris Yeltsin is returninghis country to a familiar

pre-Soviet condition instead of apost-Soviet democracy. The Rus-sian constitution provides for abroad individualized power that ismost unlike that in the western de-mocracies. Since assuming con-trol of the Russian Federation, Yelt-sin has created a strong inde-pendent presidency, a coterie ofmonopolistic businessmen, aChechnyan War, and a disaffectedpublic. Yeltsin has become moreand more accustomed to utilizingthese broad powers if not exploitingthem, thus creating a dangerousprecedent. In this respect, the Rus-sian presidential elections in gen-eral are more critical to world stabil-ity than most world leaders have leton.

The ability to govern uncheckedunderscores the mistaken stabilityof this vast land mass and shouldserve as a warning for westernleaders to direct their concerns to-ward Russian foreign policy as awhole and not just the June elec-tions. Of interest should be Yelt-sins decision to send troops intoChechnya in December of 1994 ap-parently without approval from the

Parliament or Ministers of the gov-ernment. Surely, the case for thisaction was not made clear nor con-vincing to the Russian people letalone the world community. Othermilitary movements include troopsin Georgia, Tajikistan, and med-dling in Armenia and Azerbaijan. Arecent trip to China produced a pactbetween Yeltsin and Jiang Zemingin which strategic information oftroops, military actions on the Chi-

nese borders and within the formerSoviet Republics along these bor-ders would somehow be mutuallycommunicated. Exactly who, ifanyone, is advising the President inthese movements and influencingnegotiations is not clear.

The highly personalized natureof the Russian presidency providesgreat opportunity to slide towardthe political culture similar to that ofthe Czars. Many policies andchanges have been done by presi-

dential decree. Yeltsin moved theformer KGB under his authority andaway from the Defense and InteriorMinistries. He has recently de-creed the central bank to hand over$990 million although in violation ofthe IMF agreements and the gov-ernments monetary and fiscal poli-cies (the Parliament took the "rec-ommendation" and passed the leg-islation). Despite a protest from thebank, Yeltsin overruled it and usedthe money to pay off the huge costof campaign promises. The media,

press, and political oppositiongroups have been subjected tovarious attacks on freedom ofspeech and assembly. A report onhuman rights violation published bythe UN is 30 some-odd pages long.Along the way, the Duma, Federa-tion Council, and the Ministershave been noticeably absent fromthe decision-making process.

The political system of the Czarsallowed them to rule and maintainpower through a unique relation-

ship with the Nobility. Unlike theSoviet regime where the Party andits mechanisms were highly subor-dinated to the Soviet Premier, theCzars held power in a tenuous re-lationship with the gentry throughappeasement and punishment.There is no better illustration of thisalliance than the Charter of theGentry decreed by Catherine theGreat in 1785. In effect, the Nobil-ity was released from mandatory

military and administrative duty, received freedom from taxation andcorporal punishment, access to address the Senate and court directlyand gained absolute right to all living and non-living entities on theiland. However, the Czar held absolute right to end any such privilege. The serfdom of the peasantswas sealed during this period andthe symbiotic relationship of theCzar and the Nobility would continue until 1917.

Today, Russias Parliament isdominated by old participants of theCommunist party and the government regime. Indeed, much of theprivatization of industry, financiainstitutions, and natural resourceshas benefited an extraordinarilysmall number of people. The arbitrary and dubious application oRussias tax, lending and acquisition laws has given an unusuallycorrupt appearance. The inabilityof the Russian government to stopthe contract murders associated

with big business and the mofia isviewed as evidence of collusion incorruption and appeasement tothese rogue capitalists. Challenges to the legitimacy of industryacquisitions have been ruled invalid and the Russian ConstitutionaCourt has been dismissed. A smalclass now exists who both provideto and receive from the governmena variety of political, economic, andlegal services. Indeed, membersof this group maintain their ownsmall private army for security pur

poses - against the strugglingpower groups and even againsone another. Yeltsin and his corporate gentry are swaying Russiasgovernment, her market institutions, and her rule of law.

Toward the latter part of this pasApril, a full page proclamation toYel ts in and h is main r iva lZyuganov, was run in Izvestia by 13prominent wealthy businessmen


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who represent major banking, oil,natural resource, and communica-tion industries. They have oftenparticipated in the "loans for sharesprograms" with the governmentand provided consultation for a va-riety of legislative actions andpresidential decrees. Although not

highly visible to the public in thedaily political activities of the gov-ernment and the parliament, theiraccess to Yeltsin and the influenceand benefits received under Yeltsincan not be ignored. This cozy yettedious arrangement bears somesimilarity to the Nobles and patronsof the Czars.

The Russian Orthodox Churchwas also deeply linked to the affairsof the Czars. In 1054, the EasternOrthodox Church broke from the

Roman Catholic Church. Attemptsto reunify were rebuked and theRussian churches finally left theEastern Orthodox church in 1589 tobecome its own national institutionaiding the power and legitimacy ofthe Czar. Although the Church wasvirtually subjugated to the state un-der Peter the Great in 1721, theclergy remained exempt from manyof Peters dictates and receivedfrom the state its salary, perks, andaid in enforcing its religious hegem-ony. The role the Church played in

the process of coronation of theCzar was deeply revered by themasses and legitimized the politicalsystem as morally representativeof the people and the empire.

It is not so odd with this historicalprecedent in mind to understandwhy the City of Moscow haslaunched a tremendous campaignto rebuild many of the historic build-ings and churches. Mayor YuriLuzhkov has pledged millions ofdollars to restore Christ the Savior

Cathedral Church and Yeltsin hasgiven his support. A major Russianbank donated 50 kilograms of goldfor embellishments. Churches andremnants from the Czarist periodare being restored at an unprece-dented rate - ignoring budgetaryrestraints. Increasingly, corporateinstitutions and political officialsalike are donating large sums ofmoney while seeking the stamp of

patriotic and national approval fromthe Church.

Although Catherine the Greathad secularized all church lands in1764, the Pugachev Revolt shortlythereafter demonstrated the abilityof the state to service the clergys

interests. The revolt was fueled, inpart, by an unwillingness of thepeople of the lower Volga region togive up the predominantly muslimfaith in favor of Orthodoxy. Often,the Old Believers and non-Ortho-dox were persecuted at the handsof the state as sanctioned by theChurch. Today, the Russian Or-thodox Church is working hard notonly to fill the spiritual void left by70 years of communism but also topetition officials to limit the growthof differing religious sects in Russia

that threaten its 1,000 year hegem-ony.

Throughout the campaign, Yelt-sin has been using rhetoric moreand more laden with nationalism inan effort to keep up with Zyuganov.Yeltsin made his weekly church at-tendance visible and engaged inseveral campaign stops to empha-size his nationalism and patriotism.The number of churches that havebeen restored since 1991 is repre-sentative of the huge growth in

membership and attendance.Over 85% of Russians regard theChurch positively while approxi-mately 20% attend church regu-larly. The Church has also man-aged to organize representatives inthe Army. Despite these develop-ments, more and more western of-ficials and investors cite the grow-ing strength of the church as one ofthe developing currents that willawaken civil society and eventuallysecure democracy. However, it isquestionable if the history of the

Russian Orthodox Church sup-ports this western interpretation,especially when considering theemerging characteristics of Rus-sias political system and her his-tory.

Beyond the elections and its im-mediate problems lingers the silentbut sure movement of the Russianpolitical and governmental struc-tures closer to a modern day oligar-

chy. The office of the Presidencyhas grown into a central, individual-ized power lending itself to unac-countable decrees. The businesscommunity - finance, natural re-sources, and entrepreneurial - hasemerged as a pseudo-nobility andhas shown an unusual ability to

skirt the law, direct the reform, andenjoy high-level access to power.In the meantime, the re-emergenceof the Russian Orthodox Churchhas given the moral and spiritualauthentication to the "democratic"process that has become uniquelyRussian.

Having no history of a free-enter-prise democracy, it would not bethat unrealistic if Russia first movedto a similar system of governanceunder which she lived for over a

1000 years. One certainly could ar-gue that this process towardautocractic/oligarchic rule is al-ready underway. The stability inthis region is sure to be volatile asRussias emerging political systemhas proven its sensitivity to whimsi-cal decrees, expansionist policies,and socio-economic turmoil. Al-though much has been done toemancipate the Soviet serf andbring up democracy, many of thesame socio-economic and politicalproblems exist today that led to

radical and violent political eventsthen.

*The elections on June 16th re-sulted in a Yeltsin victory of 35%over Zyuganovs 32% with an un-expected third for retired GeneralLebed of 15%. Lebed is now thewild card to draw for either candi-date to get a leg-up on the other. Ina blink of an eye, Yeltsin has re-cruited Lebed to run the SecurityCouncil and fired Defense MinisterPavel Grachev. The Security

Coucil overseas and coordinatesthe military and police. A run-off isneeded for a final poll scheduled onJuly 3rd or July 7th.


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n the first quarter of 1996there had been more insol-vency than ever. The num-

ber of companies who went bank-rupt during the first three months of1996 were a total of 6,090. This isan increase of 14.1 percent.

The construction industry is insevere recession. The unfilled or-ders will decline by three to four

percent for 1996 and even more for1997. The President of the Haup-

tverbandes der Deutschen Bauin-dustrie (Building association) Mr.Christian Roth : With another100,000 unemployed and a record

of more than 6,000 insolvency inthe construction industry the situ-ation is far more critical than wethought.

The Bund der Steuerzahler(Society of taxpayers) has calledthe 6thof June a special MemorialDay. Up to this date the averageGerman has paid his duty in taxesand dues. The increase in socialdues and taxes has led to anotherrecord for 1996.

The recently announced drop o0.5 percent in real first quartegross domestic product does underline the challenge Germany

faces in meeting the MaastrichTreatys debt and deficit criteriaThe Emu is a subject which will nolie down - both - internally and externally. With the decision upon thefounder members of the Europeaneconomic and monetary union stilbeing 18 months away, there isacute concern that neither Germany nor France will qualify. Germany should bring its budget deficiunder the all important three percent of GDP next year and in thefollowing years. But the govern

ment debt ratio looks set to break


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through the upper limit of 60 per-cent of GDP this year and even riseto 61.5 percent in 1997. This coulddevelop into serious embarrass-ment for the German Finance Min-ister Mr. Waigel. He is the one whoinsists that the Maastricht criteriashould be strictly interpreted if Emu

is to go ahead as planned.

Internally the challenge will be-come even bigger. Europes singlecurrency will only be credible if in-vestors are convinced that the Emuarea will be one of monetary stabil-ity, underpinned by strict interpreta-tion of the treaty. Some Germanmoney has already started to travelto Switzerland due to concern forthe future of the Mark. 1,034 billionof Deutsche Mark are resting for ameagre return between five to

seven percent before taxes and in-flation in savings, while 989 billionare invested in private life insur-ance. Up to date the German presshas not yet published any negativearticle or even dared to ask uncom-fortable questions with respect tothe Euro. But some Muellers andMaiers start to contemplate about apossible hidden devaluation whichmight happen to the Mark when sheis renamed to Euro.

There is something rotten in

the State of Germany

There is a collective subtleAngst about the future. Every-body thinks there is somethingwrong but nobody wants to start tosay it loudly. She took off vertically,climbing with grace and strength,displaying precision planning andGerman engineering all those whohad derided the value of Europeanco-operation. But just as she wasabout to break free from gravity,she burst into flames and disinte-

grated.

This is not Ariane 5, the ill-fatedEuropean space rocket. This is theGerman economy, still avoiding tobe in recession officially. The crite-rion will be negative growth for twoconsecutive quarters. The truth ofthe matter is that Germanys econ-omy is in trouble. Mr. Kohls prob-lem is not whether the economy isin recession this quarter or not. The

real problem is that Germanys ver-sion of the social market economyis breaking down. The slow growthdoes not help at all - it is even avicious circle because the real rea-sons for Germanys trouble are in-deed its high wages, its inflexibleindustrial legislation and its bound-

less welfare spending.

Six weeks ago the ruling partyannounced after months of pro-crastination a $33 billion savingpackage. It includes tougher ruleson unemployment payments, a oneyear freeze on social welfare hand-outs, reduction on sick leave, ahigher retirement age and biggerfees for medicine. Mr Kohl eventried to sell the whole package bysaying that it was not an attack onthe social welfare state. Politicians

should understand that austerityshould be the order of the day forthe government. There are not yetany signs of a recovery. Worse,while the government struggles toturn its planned supply measuresand spending cuts into action, busi-nesses are voting with their walletsand investing abroad.

How is business done withinGermany? If you would be facedwith the problem of finding a painterto decorate your office you would

probably experience the following:

Painters are in abundance andall were willing to do the job straightaway. But they all set the samecondition: payment in cash to avoidGermans crippling tax and socialcharges. If you want to have the jobdone with a proper invoice in orderto deduct the costs from your owntax burden you must wait for five toseven months before you would getyour office painted. This is Ger-manys efficient tax system.


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Beijings PR Offensive

aunching an unprece-dented PR offensive, Bei-jing has swapped its guns

for words as it seeks to calm 1997handover worries and promote itsone China policy. After the sabrerattling off the Taiwan Straits inApril and unsettling rhetoric by mi-nor officials about Hong Kongs

post 1997 future, now Beijing isdoing its best to present a moreacceptable face. Seeking to sys-tematically calm fears about thehandover, the silver haired and sil-ver tongued Lu Ping, Chinas topman on Hong Kong affairs hasbeen rolled out to audiences, ap-pearing on two US television net-works and visiting key Asian lead-ers in the past two weeks.

China - afraid of

democracy ?Refuting assertions that China

was simply afraid of democracy, LuPing replied not at all and promisedthat by the end of 1998 there will bethe first elected legislature accord-ing to the Basic Law. This is theclearest commitment yet given thatnew polls will replace the provi-sional legislature which Beijing willset up next year to supplant the oneelected in 1995 which is viewed astainted by Governor Pattens en-

dorsement. Lu Ping even went asfar as to say that the territorys Lib-eral Party led by vocal China criticMartin Lee would be free to standin elections as long as they abideby Hong Kong law.

What will Hong Kongs law be bythen? Concerns remain that theinterim legislature will be used tochange laws as directed by Beijing,particularly in matters relating to

any sort of behaviour that might bedeemed to be subversive or inter-preted as advocating changes tothe status quo. After 20,000 gath-

ered in a Hong Kong park to holdcandles to keep a vigil on the anni-versary of the June 4th 1989Tiananmen crackdown, fears wereexpressed that even this form ofcivil protest might not be permittedafter 1997.

Turning to Hong Kongs media,Lu Ping promised it would be freeeven to criticise Beijing. Howeverthis rests on Beijings interpretationof freedom, a delicate subject, suchas advocating independence for

Hong Kong, Taiwan or Tibet, wouldbe off-limits. While this may sounda pretty weak concept of freedomby western standards, those usedto the democratic ways of the AngloSaxon world should realise thatwhat Lu Ping is offering is compa-rable to Singapore and better thanmany citizens of other Asian coun-tries can hope for. During his weeklong trip to Japan, Lu promotedHong Kongs economy andstressed that any talk of lack ofconfidence is unfounded. A pledge

not to raid Hong Kongs $70bn cur-rency stabilisation fund was reiter-ated.

While action not words will bethe final adjudicator, the fact thatChina is making an effort to en-gage the media and internationalopinion must be encouraging. Ifthe much quoted vanishing ofthe Hong Kong markets politicalrisk discount factor after 1997 isto materialise, more work still re-mains to be done by Lu Ping(who retires on 1st July 1997) hissuccessors, and their politicalmasters in Beijing.

China embraces ASEAN

Chinas engagement tacticshave also been seen in its dealingswith ASEAN - the Association ofSoutheast Asian Nations groupingBrunei, Indonesia, Malaysia, the

Philippines, Singapore, Thailandand Vietnam. This week officialsfrom China and ASEAN concludedthe second round of consultative

meetings on various security issues, including sovereignty ovethe disputed Spratly Islands andthe proposed ASEAN nuclear freeZone. Discussions were "productive" and the Chinese governmenwas generally viewed as havingtalked more freely and openly thanbefore on the Spratlys, even goingas far as to give direct answers asto why it attacked one of the disputed islands, Mischief Reef aboua month ago. Although Chinas apparent policy stance may be genu

ine, it may also reflect Beijings desire to beef up its chance of gainingformal acceptance as ASEANsnewest member. Chinas diplomatic embrace - some may call it abear hug - also has the motive oisolating Taiwan which is alreadyfinding its diplomatic profile, ambiguous at best in the ASEAN capitals, hard to maintain.

Taiwan gets diplomaticcold shoulder

One particular focus of Chinasdiplomatic efforts is an official levebi-lateral dialogue with ASEANscheduled for mid-June in Indonesia where it hopes to sign a politicaaccord. Those familiar with thetreaty say it frames a closer relationship between Beijing and ASEAN and includes an affirmation othe latters one China policy whichfurthers the policy of isolating Taiwan from its neighbours. Howeveit is thought to be unlikely any

agreement will be signed.

Taiwan market regionstop performer

So far the Taiwanese stock market is unimpressed by these movesto isolate Taiwan diplomatically asit has been the regions top performing bourse recently - now up36% from its March lows when


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China was threatening invasion. Inthe new spirit of China engagementby newly elected President LeeDeng Hui, Taiwan has seen a re-turn of funds given a further boostlast week by the announcement byMorgan Stanley that the Taiwan

market will be included on its influ-ential Emerging Markets Index. Atangible sign that relations in theeconomic sphere are improving be-tween China and its rogue provincewas the signing of an agreement toallow partial direct flight between

the mainland and Taiwan, althoughlanding in Hong Kong is still re-quired and a change in flight num-ber.


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The Dow rallied reaching our tar-

get objective of 5800 on May 23rdprecisely in line with our EconomicConfidence Model. Here we seethat a weekly closing BELOW5433.6 will signal that a sharp cor-rection is indeed going to follow.Overall, the major support in theDow honestly begins back at the5051.7-4976.5 area. A weekly clos-ing below 5458.5 will signal that acorrection has indeed begun. Amonthly closing BELOW 5342.5would also signal that a correctionmay develop going into at least Au-

gust or October.

Silver is poised to crack the $5level with a serious risk of declinedown to the 4.75-4.50 zone. Theideal target date where a major lowmight form remains June 27th. Ifsilver does not reach at least 4.75during June then there remains thedistinct risk of a continued declineat least until August. Any new lows

beyonds August warns that the fi-nal low could extend into theFeb/Mar 1997 time period. Underthis scenario, silver still shows thepotential to drop slightly below the$3 area. That would tend to providean excellent buying opportunity forthereafter we see a rally extendinginto 2003.

Gold continues to show criticalsupport at the $380.70- $379.30area. Our computer models are notas bearish for gold as there are for

silver. This would only developshould gold penetrate below the$341 level. We do see that amonthly closing below $379.30 onspot will be a very bearish signalwarning that a continued declinewill be possible into the monthsahead. We do see July as a keytarget for a low in gold. Therefore,pay close attention to the closingfor gold at the end of June.

The economic numbers for the

economy going into May appear tobe very strong. Most of these num-bers will be released during Juneso expect this trend for the near-term to act as a bearish influencefor the time being. However, the USeconomy will start to slow downsomewhat following May. Thebonds themselves appear to havesupport at 10801 on a monthly clos-ing basis. If June closes below thisarea on a nearest futures basis,then a further decline down to the10100-10110 level should unfold.

Additional support lies at the 10422and 10215 level. Only a monthlyclosing BELOW 9601 would signala continued bear market ahead.

Long-term, we see that the bondmarket is still within the broadertrend of a bullish posture. This sug-gests that we could find a sharpinverted yield curve developingwith the 30 year bonds making onemore new high during early 1997.Again, this scnario would come un-der question if we experienced a

monthly closing below 10100 fol-lowed by 9600.

The US dollar remains strongagainst most currencies. However,we are nearing a period where ashort-term correction is likely. Aweekly closing below 14969 for theDollar/Dmark will signal that a cor-rection is underway. Resistance forthe dollar stands at 15626 and

15838. Only a weekly closingabove the 15838 level will signal abreakout to the upside for the dol-lar.

The Canadian TSE reached itsintraday high on May 28th preciselyin line with our Economic Confi-dence Model. The correction we

have been expecting appears to betaking shape. We see supportforming at 50022, 49679 and46114. Monthly support lies at

48182, 44867 and 39807 followedby 39307. A weekly closing below50022 will signal that this marketshould continue to decline. Amonthly closing below 49679-48182 area. If we see a monthlyclosing below 48182, then there willbe a risk that the TSE could declineat least going into the October timeperiod. A monthly closing below44867 would then raise the possi-bility that this market will collapsesharply back to retest the 39000zone. Worst case scenario for a

correction would be if new lows un-folded beyond October. This wouldthen point to a possible correctioninto March or May of 1997.

Here we find the London FTreached its high on April 22nd at the38589 level intraday. Very criticalsupport lies at the 36474 area on aweekly closing basis. A break ofthis area could set the stage for a

more serious decline in the weeksahead. A monthly closing below34334 would warn that a sharp de-cline back to the 29250 area is en-tirely possible.

The German Dax reached itshigh on June 12th. Here we seesupport starting at the 25250 levelon a daily basis. A weekly closingbelow 25360 will at least warn thata temporary top has been estab-lished. A weekly closing below24535 would warn that a more se-rious correction is indeed possiblein this market as well. Our com-puter models clearly warn that ahigh is possible during June.Clearly, a monthly closing back be-low 23620 would warn that a cor-rection of 3 to 6 months could be inthe making at this time.


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INDUSTRIAL PRODUCTION:Figures for industrial output re-flected modest economic growthand little underlying upward pres-sure on inflation. The Federal Re-serve said total industrial produc-tion jumped 0.9% in April, but therise reflected mostly the resump-tion of production at General Mo-tors after a strike in March closedmost of its plants for three weeks.

Excluding the effect of the strike,industrial output would have beenflat in April.

MODERATE ECONOMICGROWTH: The US economy grewmodestly in the prior two months,with little sign of inflationary pres-sures, a survey of regional busi-ness conditions by the Federal Re-serve shows.

The survey by the Feds 12 re-gional banks showed all districts

except New York were sharing inthe expansion. Several districts"noted the pace of expansion hadquickened recently".

"Price increases remained gen-erally subdued and there were onlyscattered reports of wage pres-sures despite continued tight labormarkets and somewhat strongereconomic growth," the survey sum-mary said.

RETAIL SALES: The Com-

merce Department said retailsales had fallen 0.3% in Aprilagainst expectations in financialmarkets of a zero increase. Theoverall fall in retail sales reflected a2.5% decline in car sales fromMarch. Excluding cars, sales wereup 0.4%. Officials also revisedsales figures for March to show anoverall gain of 0.5%, rather than the0.1% as previously reported.

INFLATION:The Labor Depart-ment said consumer prices hadrisen 0.4% in the month and 2.9%in the year to April. However, the

closely watched "core" consumerprice index - which excludes foodand energy - rose only 0.1%, lessthan feared. The consumer priceindex was pushed up mainly byhigher energy costs, which rose3.2% from March. Energy costshave risen sharply for 5 monthsrunning.

PURCHASING MANAGERSINDEX:The purchasing managersindex - a guide to conditions inmanufacturing industry - rose to

50.15 in April from 46.9% in March.It was the first time the index hasrisen above the 50% level - thethreshold for expansion in the sec-tor - since last July.

The reports also contained en-couraging news on orders. The as-sociations index of new ordersrose to 53.8% from 49.7%, signal-ing the first expansion in corporateorder books in six months. Its pro-duction index also rose sharply, al-though this may have been dis-

torted by the end of the strike atGeneral Motors, the car company.

CONSTRUCTION SPENDING:The Commerce Department re-ported a 3.1% increase in construc-tion spending in March - the largestmonthly gain in four years.

CONSUMER CONFIDENCE:US consumer confidence rose inApril to its highest level in morethan a year. The ConferenceBoard, a business group based inNew York, said its confidence indexrose to 105.3 from 98.4 in March.Mr. Edgar Fiedler, economic coun-sellor at the board, said the im-provement was "largely attributableto less apprehension about em-ployment conditions". In the latestsurvey, the proportion of peoplesaying jobs were difficult to get fellfrom 26.2% to 21.3%, the lowestpercentage in more than six years.

In May, the US consumer confidence index fell to 101.2 from arevised reading of 104.8 in Aprilthe Conference Board said. The

Conference Board said consumerswere not as optimistic about thenext six months as they were theprevious month. A larger proportionof consumers expect business conditions to worsen. The expectationcomponent of the index fell to 89.7from a revised 95.9 in April, and thepresent situation component roseto 118.3 versus a reading of 118.2in April.

EMPLOYMENT COST INDEXThe Labor Department said its em

ployment cost index - which includes the cost of fringe benefitssuch as healthcare - rose 3% in theyear to March, against 2.8% in theyear to December.

PRODUCER PRICES: The Labor Department said the produceprice index for finished goods rose0.4% in the month and by 2.5% inthe year to April. However, excluding the volatile food and energycomponents, "core" produceprices rose only a marginal 1%.

TRADE DEFICIT: A surge in imports led to a sharp increase in theUS trade deficit in March, according to the Commerce DepartmentThe deficit rose to $8.9 billion. However, the March shortfall was significantly higher than the deficit inFebruary, which was revised downto $7 billion from an initial estimateof $8.2 billion.

The monthly deficit has averaged about $8 billion in the pasthree months, from a peak of $10billion-$11 billion last summer.. Thedeterioration between Februaryand March mainly reflected a 1.7%jump in imports to $77.7 billion, arecord in cash terms. This increasewas led by higher imports of industrial supplies and capital goodsThe nations oil bill fell in spite ohigher oil prices because of a fall inthe volume of petroleum imports


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Exports fell 0.8% to $68.8 billion,reflecting declines in sales of carsand consumer goods.

The overall deficit rose in spite ofsignificant declines in the bilateraldeficit with several important trad-ing partners, including China and

Mexico.

TOURISTS: The UK expects towelcome a record 25 million visitorsin 1996, after seeing a 6% jump innumbers in January and February.There were 24 million visitors to theUK in the 12 months to the end ofFebruary, up 12% on the previous12 months, according to NationalStatistics. The figure was swelled

by a 9% rise in American visitors, a12% increase in West Europeanvisitors, and a 12% jump in visitorsfrom the rest of the world. UK visitsoverseas rose 4% to 42.0 mill ion inthe 12 months to the end of Febru-ary.

TRUCK REGISTRATIONS:Statistics from the Society of MotorManufactures and Traders showedthat Aprils registrations fell to 4,257vehicles compared with 4,983 inthe same month a year ago. The

market for the first four months ofthe year plunged to 6% below thesame period last year, with 17,080vehicles registered compared with18,169.

Commercial vehicle sales areconsidered a useful indicator ofeconomic activity. But the figuresare sending out conflicting signals,as registrations of lighter commer-cial vehicles continued to be rela-tively buoyant in April. Total newcommercial vehicles registrations

last month were 0.8% higher thanin the previous April.

NEW CAR REGISTRATIONS:New car registrations leapt by morethan 17% in April, the largest year-on-year upturn for a single monthfor several years. The SMMTs sta-tistics showed that new car regis-trations to private motorists were15.9% higher in April comparedwith the previous April, reversing a

year of almost unbroken decline.However, private motorists shareof Aprils total of 162,618 new carregistrations remained at 43%, thesame as April last year.

FACTORY OUTPUT: Britainsmanufacturing industry is techni-

cally back in recession because, inthe first three months of the year,factory output recorded its secondsuccessive quarterly fall. Weak ex-port markets and an unwantedbuild-up of unsold goods have per-suaded many manufacturers to cutproduction and meet demand fromthe storeroom shelf. Output is nowno higher than its pre-recessionpeak in 1990.

The Office of National Statisticsrevised down its estimates of fac-

tory output in January and Febru-ary and reported a rise in produc-tion of just 0.2% between Februaryand March. As a result factory out-put was 0.2% lower in the first quar-ter of 1996 than in the final quarterof 1995.

INFLATION DATA: The cost ofliving for tax payers fell sharply inApril, as the last budgets tax cutstook effect and mortgages becamecheaper. The drop left the annualinflation rate in the tax and price

index - which includes tax pay-ments, services and goods - show-ing the sharpest monthly improve-ment for ten years.

The improvement should boostconsumer spending power - par-ticularly now that wages are risingfaster than prices. However, otherelements of the inflation data wereless comforting for the government,which made no progress in movingtowards its inflation target.. Meas-ured overall, the Office for National

Statistics said the retail price index,which excludes taxes, was 152.6 inApril, with 100 representing thelevel of prices at the start of 1987.

This left the annual inflation rateat 2.4% - sharply lower than theprevious months rate of 2.7%, andthe best figure for 18 months. Butthe underlying rate of inflation -which excludes mortgage interest

payments - was 2.9%, unchangedfrom the previous three months.

The difference in the two trendsarose because of improvements inmortgage costs due to previouschanges in home loan interest reliefand lower rates.

INFLATION TARGET: Mr. Ed-die George, governor of the Bankof England - the UKs central bank- warned that the chancellor of theexchequer would probably have toraise UK interest rates at somepoint if he was to hit the inflationtarget in two years.

The Bank believes that weak ex-port markets and excess stocks ofunsold goods could still prompt asharp slowdown in economic activ-

ity, although the risk of this haddiminished over the last threemonths. The slowdown in "hard-core" Europe is expected to be rela-tively short-lived following cuts ininterest rates there.

The Bank predicts that underly-ing inflation i the UK - excludingmortgage interest payments - willfall from its current 2.9% to below2.5% over the next year, reflectingthe recent weakness of economicgrowth. Inflation is then expected to

pick up again to around 2.5% inMarch 1998 as growth accelerates,driven by a stronger consumerspending and investment.

UNEMPLOYMENT: The num-ber of people without work andclaiming social security benefits fellmodestly in the UK in April. Afteradjusting for normal seasonal ef-fects, unemployment fell by 3,200in April to a five-year low of2,183,500. But the Office of Na-tional Statistics said that a number

of special factors had limited thesize of the decline.

The statistics office estimatesthat unemployment is still falling ata trend rate of about 10,000 amonth as it has done for the pastsix months or so. Unemploymentfell by 5,500 among men and roseby 2,300 among women, leaving7.8% of the labor force employed in


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April - unchanged on the previousmonth.

The number of people unem-ployed for six months or more rosefor the second consecutive quarterin three months to April, but statis-ticians said seasonal factors were

masking a continued downwardtrend. Some 56.3% of the unem-ployed had been without work forsix months or more in April, thelowest share for four years. Thenumber of people unemployed forsix months or more was 9,700lower in the three months to Aprilthan in the previous three monthsto January, taking the total figure to806,300 or 36.3% of the overallunemployment count.

STAGNATING INDUSTRY:

Britains manufacturers reportedthe first fall in factory output for 31/2years as companies suffered thebiggest decline in new orders sinceSeptember 1992.

The Chartered Institute of Pur-chasing and Supplys overall indexof manufacturing activity - whichcollates data on stocks, employ-ment, output, delivery times andorders from purchasing managersat 310 companies across the UK -was a seasonally adjusted 48.3 in

April compared with 49.4 in March.A reading below 50 indicates a con-traction in activity.

This was the third month in a rowactivity has declined. Mr. PeterThomson, the institutes director-general, said there had now beenno growth in manufacturing for ninemonths.

The institutes measure of pricepressures fell to the lowest levelsince the survey began in 1991 as

manufacturers cut prices for thesixth consecutive month.

TWO SPEED ECONOMY:Con-sumer spending recorded itsstrongest growth for more than twoyears in the early months of 1996 -but UK manufacturers ordersbooks are in their weakest statesince the end of 1993. The dichot-omy between the UKs stagnatingmanufacturing sector and its buoy-

ant service industries was under-lined by a series of official statisticsand business surveys. They high-light the difficulties posed to theTreasury and the Bank of Englandby Britains two-speed economy.

After taking account of inflation,

consumer spending grew by a sea-sonally adjusted 0.8% in the firstquarter of the year, according to theOffice for National Statistics. Thiswas the highest figure for ninequarters. Output in manufacturingfell for the second successive quar-ter, reflecting weak export growthand companys efforts to shedstocks of unsold goods.

CONSUMER SPENDING: TheUKs largest banks lent moremoney to consumers in April than

in any month for five years, provid-ing further evidence of the growingmomentum behind consumerspending. The British Bankers As-sociation reported a BP566 million($860 million) rise in consumercredit in April, more than double theincrease seen in April last year.Within the total, credit card lendingwas also well up on last year.

Lending by banks and buildingsocieties - mutually owned homeloans and savings institutions - as

whole rose by BP4.2 billion in April,the lowest since last November.Bank and building society depositsalso rose relatively modestly, al-though the annual rate of increasein the broad money supply meas-ure M4 edged up from 9.9% to10%.

GOVERNMENT BORROW-ING:Rapid growth in spending byministries meant that the govern-ment had to borrow more in Aprilthan the City of London expected to

meet the shortfall between itsspending and its tax revenue. Thepublic sector borrowing require-ment totaled BP3.3 billion in April,the Treasury said. This was morethan BP400 million down on thesame month a year earlier, butnonetheless slightly higher thaneconomists had predicted.

FIRST_TIME HOUSE BUY-ERS:First-time house buyers are

returning to the housing market, according to figures on mortgagelending by retail banks. In the firsthree months of this year, 43% othe home loans approved by thebanks went to first-time buyersThis is the highest proportion during a three-month period in almos

two years.

LEADING INDICATORS: Japans index of leading economicindicators fell below a symbolicboom-or-bust line in March for thefirst time for six months. The Economic Planning Agency said thediffusion index of leading indicatorsfor the month was 45.5%, its loweslevel since August. The index is

generally a reliable indicator of conditions about six months ahead; thefigure of 50 is seen as marking theborderline between growth andstagnation.

The coincident index, measuringcurrent economic activity, also felbelow the 50 figure for the first timesince last Autumn, hitting 40%. BuEPA officials said the March setback did not alter their overall as-sessment the economy was on amoderate recovery track.

TRADE GAP FALLS: Japanstrade surplus fell by nearly twothirds in April to the lowest monthlylevel in 13 years, a far sharper decline than expected and evidenceof the impact of companies shiftingproduction abroad.

The trade gap shrank 65.5% toY320.66 billion ($3.05 billion) in theyear to April, the 17th consecutivemonth of decline, according to customs-cleared figures published by

the finance ministry.

Imports grew by nearly 31% inApril, led by computers, semiconductors and manufactured goodsdrawn in by robust private and corporate demand as Japans economic recovery gathers paceThere were also one-off factors, including a cut in import duties onpork and a 27% rise (in yen termsin the price of oil, which affec


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nearly 40% of the import bill. Ex-ports, by contrast, rose by just 5%,less than half last years averageexport growth rate, and in part ex-plained by a fall in overseas carsales.

Japans trade surplus with the

US fell by 56% in April to Y172.09billion, the largest fall for 16 years,while its surplus with the EuropeanUnion fell by just over a half. Itssurplus with other Asian countries,normally eager to buy Japanesemachinery to equip their fast -in-dustrializing economies, declinedby a third, the first drop in twomonths.

UNEMPLOYMENT: Japaneseunemployment fell slightly to 3.1%in March. The jobless rate fell for

the second month in a row, from3.3% in February and a post-warpeak at 3.4% in January. At thesame time, the number of people inwork rose by 170,000, or 0.3%, dur-ing the year to March.

To underline the job marketscontinuing relative weakness, thelabor ministry reported that therewere just 67 vacancies availableper 100 applicants in March, thesame as the previous two months.The latest job figures illustrate a

shift of economic activity from pro-duction into services and from largecompanies to small. Businesseswith 500 or more employees shed320,00 jobs in the year to March,while companies below that sizecreated 810,000 over the same pe-riod.

Service industry employmentrose by 1% to 15.62 million jobs inthe year to March, while manufac-turing industry lost 1% of is work-force, down to 14.27 million in

March. The biggest job loss wasagriculture, where jobs fell by 5.6%to 2.89 million over the period.

By sector, construction was thebiggest creator of jobs, up 3.8% to6.8 million, the beneficiary of publicworks programs.

HOUSING STARTS: The con-struction industry announced an8.2% year-on-year rise in housing

starts to 122,394 in March, a con-sequence of Japans low interestrates.

VEHICLE SALES: New vehiclesales in Japan fell in April for thesecond straight month, accordingto figures published by the Japan

Automobile Dealers Association.Registrations of new vehiclesdropped 0.1% on a year earlier to374,405.

The main reason for the fall wasa big drop in sales of commercialvehicles. Trucks declined 2.6% to118,182 units, while buses fell13.3% to 1,593 units. A slight riseof 1.2% in sales of passenger vehi-cles to 254,630 units was notenough to offset the commercialsides slump.

Once again, the figures showedthe growing Japanese taste forlarge, imported cars. Of the total,foreign-made vehicles made up9%, at 33,042, a jump of 23.7%from a year ago.

FOREIGN EXCHANGE RE-SERVES: Japans foreign ex-change reserves reached anotherglobal record of $205.7 billion inApril, the finance ministry said. Themonthly increase of $1.7 billion was

the thirtieth straight rise, bringingtotal reserves to a record high forthe fifteenth consecutive month.

But the increase in April wasconsiderably below the averagemonthly rise in the past two years,reflecting somewhat subdued inter-vention in foreign currency marketsby the Bank of Japan.

BANKRUPTCIES:Fewer Japa-nese companies are going out ofbusiness, according to the latest

monthly survey of bankruptcies. InApril, 1,159 companies closed,down nearly 11% on April last year,the third monthly decrease in a rowsaid Teikoku Databank, an inde-pendent credit research agency.The decrease is broadly spread:manufacturing bankruptcies fell11.7%, while property companycollapses were down a fifth andwholesalers by 17.6%.

But Teikoku warned that theoverall improvement is not as greatas it appeared because bankrupt-cies were unusually numerous in1995, when there was a chain re-action of collapses of banks andcredit associations in the Kansairegion, western Japan. Corporate

collapses will continue to run atmore than 1,000 month, as theyhave done for more than a year, forsome time, predicted the agency.Of the total, just over 60% of com-pany bankruptcies were the resultof poor sales, a sign that the paceof the recovery, while broadlyspread, is as yet moderate.

INDUSTRIAL OUTPUT: Ja-pans industrial output rose by3.9% from March to April, in linewith a modest recovery, but this

was not thought strong enough totempt the central bank to raise itsrecord low official discount rate.The April increase in production,according to seasonally adjustedpreliminary data from the Ministryof International Trade and Industry,appears to mark a steep bouncefrom a record 6% month-on-monthdecline in March.

Both figures are, in fact, exag-gerated by statistical factors. Quar-terly averages, giving a clearer

measure of the trend, show thatindustrial production rose by 0.4%from the last three months of 1995to the three months ending inMarch and it is set to rise 1% in thesecond quarter to June, the thirdquarter of growth, according toMITIs latest forecast. That wouldbring year-on-year output growth to1.9% in the second quarter, a levellast seen in the same period lastyear, just before production startedto slow, due to the after-effects ofthe Kobe earthquake. MITI officials

said increased sales of personalcomputers and mobile phones ledthis latest recovery.

The ratio of inventories of unsoldgoods to deliveries fell by 4.4% inApril but, even after that fall, stockswere slightly above February lev-els, swollen by an end of 1995 pro-duction increase in anticipation of asales boom in the new year whichfailed to materialize.


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MONEY SUPPLY: The mostcommonly used measure of moneysupply, M2 plus certificates of de-posits, grew 3% in April, slightlydown from 3.1% in March, accord-ing to preliminary report from theBank of Japan. Economistsgreeted the slowdown as a sign

that the economic recovery is stillmodest.

The narrow measure of money,M1 - composed of cash in circula-tion and demand deposits - alsoslowed, though it continues to growfaster than broader money supply.M1 expanded by 15.3% in April,down from 16.1% in the previousmonth.

GERMANY SLIPS INTO RE-CESSION: The German economycontracted for the second consecu-tive quarter in the first three monthsof this year, implying the countrywas in a recession, according to USand UK definition.

Without giving figures, the Bonngovernment reported that GDP inthe first quarter declined on a priceand seasonally adjusted basis "toan extent similar to the previous

quarter" and showed hardly any in-crease compared with the firstquarter of last year.

The statement from the Bonneconomics ministry implied that theeconomy shrank by about 0.5% inthe three months to the end ofMarch, which was the decline re-ported for the October to Decemberperiod.

The ministry blamed the down-turn on the unusually long and

harsh winter that hit the construc-tion industry and other and othersectors. It said the available eco-nomic activity, which mostly in-cluded March figures, gave hardlyany indication of a recovery

ECONOMIC SLOWDOWN RE-DUCES REVENUE FORECAST:The German economy probablycontracted in the first quarter of thisyear, prompting the Bonn finance

ministry to scale back sharply itsexpectations of tax revenues forfederal, state and local authoritiesbetween now and 2000.

The Berlin-based DIW researchinstitute reported that an unusuallyharsh winter helped push first quar-

ter real gross domestic product0.5% below the previous threemonths level and 0.1% below thefirst quarter of 1995. The DIW fig-ures, adjusted for inflation and toreflect normal changes in the sea-sons and the working days, are re-leased some weeks ahead of offi-cial GDP statistics.

The institute said output in east-ern Germany contracted 2.5%compared with the final 1995 quar-ter and was 0.7% below the first

1995 quarter, largely because of aweather induced collapse of con-struction activity.

Its statistics showed the westernGerman economy stagnated in thefirst quarter while output nation-wide was flat in the final quarter of1995. This latter finding contrastedwith an earlier DIW report and re-cent official figures which pointed toa drop in GDP last year.

Mr. Leo Waigel, finance minis-

ter, said the long winter had forcedthe government to cut its expecta-tions of growth and tax income forthis and subsequent years. Report-ing on the findings of group of ex-pert officials, he said overall reve-nues for federal, state and localauthorities this year were now ex-pected to be DM807.1 billion (526billion), or DM21.7 billion below aforecast of last October.

The minister said federal tax in-come alone was expected to be

DM11.8 billion less this year thanwas thought seven months ago .

According to a report issued bythe Munich-based institute for eco-nomic research (Ifo), Germanysbusiness community is showingsigns of cautious optimism for thefirst time in more than a year.

The new mood is based on a risein export orders and hopes of a

long-awaited recovery in retailingBut the east German businesscommunity does not share the optimism, says the report. Wholesaleand retail trade in the five easternstates remains depressed as consumers continue to save and unemployment continues to rise.

The upturn in confidence is expected to provide a psychologicaboost for industry, after the discouraging statement from Bonn regarding the GDP.

Ifo, which bases its report onresearch conducted in April, believes the grounds for cautious optimism among the business community stem partly from the rise inthe US dollar. The strong D-Markand the weak US currency were

among the main reasons for loweprofits, particularly in the machinebuilding and pharmaceutical industry last year.

Construction and retailing remain fragile, but Ifo says retailing isno longer in the "hypothermiazone". In April, the German consumer had started to buy moreclothes, shoes and home electronicequipment.

The findings will be welcomed

by Germanys Association of Retailers, which recently reported a2% fall in retail sales last year, withlittle prospect of growth this yearAs for the construction industryany upturn which Ifo detects mayallay fears of this sector remainingin recession this year. In April, Ifosaid the building industry was in itsfirst recession since German reunification, would face job losses o80,000-100,000 this year ad wouldrecord a decline in investment by2-3%

PUBLIC SECTOR DEFICITThe Bundesbank warned in a report that Germanys large and rapidly growing public sector deficithreatens to upset domestic capitamarkets by taking up too large aslice of available funds.

The Bundesbank said in itsmonthly report that last years public sector deficit of DM117 billion


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(76 billion) was 42% higher than in1994, and was equivalent to 4% oftotal disposable income. So far, thestates high borrowing requirementhad not caused too many problemson capital markets because invest-ment by industry slowed down lastyear as a result of slackening eco-

nomic growth.

Companys external financingneeds fell in 1995 by 45% to DM32billion. Finance for new construc-tion stagnated after sharp rises inprevious years. The economys re-maining financing needs, met byborrowing abroad, fell by 35% toDM29 billion. The public sectorsweight in Germanys overall bor-rowing structure had increasedrapidly since reunification in 1990.

Public borrowing had risen by anaverage 14% a year; a rate thatwas 1 1/2 times greater than in theperiod 1979-89. At the end of lastyear, around a third of the DM6,700billion total domestic non-bankingdebt was accounted for by the pub-lic sector. It was only a quarter in1989 and a fifth in 1979

CURRENT ACCOUNT SUR-PLUS:Germany had a current ac-count surplus of DM700 million($460.5 million) in February, com-

pared with a deficit of DM3.8 billionin January and a deficit of DM2.3billion a year earlier, according tothe Federal Statistics Office.

Germanys trade surplus grewDM8.8 billion in February fromDM5.2 billion in the previous monthand DM5.8 billion in February1995. In the two months to Febru-ary, Germany had a current ac-count deficit of DM3.1 billion, nar-rower than a deficit of DM3.8 billiona year earlier.

Germanys trade surplus in the2-month period totaled DM14 bil-lion, narrower than DM14.5 billiona year earlier. The balance of invis-ible trade in February showed adeficit of DM1.8 billion, down fromDM4.4 billion in January and com-pared with DM2.4 billion a year ear-lier.

INDUSTRY: German industrywas working on average at 81.9%of its capacity in March, down from84% in December, according to thelatest economic survey conductedby the leading Ifo economics insti-tute.

But new orders for Germanmanufacturing industry rose 1.2%in March, faster than expected, ac-cording to the Economics Ministry.

M3 MONEY SUPPLY: Ger-manys M3 measure of money sup-ply rose an annualized 12.3% inMarch compared with the last quar-ter of 1995. In February M3 hadrisen 12.8%.

IMPORT PRICES: German im-port prices rose by 0.3% in April

from March and by 0.8% from ayear earlier. Export prices climbed0.1% and 0.6% respectively.

UNEMPLOYMENT: The num-ber of Germans out of work hasfallen below 4 million for the firsttime this year according to officialfigures for April. The headline fig-ure for the number of people with-out jobs fell to 3.97 million, or10.4% of the workforce, down from4.14 million in March. The season-ally adjusted figure showed that the

number of jobless had fallen by62,000 to 3.94 million, down from 4million in March, but still 363,000more than in April last year.

EAST GERMAN BUSINESSCLIMATE WORSENS: The busi-ness climate in east Germany de-clined notably in the first quarter ofthe year, according to the Instituteof the German Economy. A surveyof the turnover and profit expecta-tions for 1996 of 500 companiesproduced the worst result since

1993. The construction industrywas particularly pessimistic, the in-stitute said. Companies in the serv-ice and investment goods sectorswere more positive.

There seems little chance of im-provement in unemployment as thenumber of east German companiesplanning redundancies rose to 64%from 40% last autumn. This is partlydue to the generally poor economic

situation in the electrical, chemicaland energy distribution industries.

Seen on a regional basis, Berlinwas the most pessimistic. Nearly70% of the companies in the cityexpect turnover and profits to dropthis year. Saxony, where there was

a small increase in the number ofcompanies expecting better re-sults, was the most positive. Thesurvey shows export expectationshave generally remained robust.

EAST GERMAN TRADE:East-ern Germanys trade with the restof the world grew last year by15.4% to DM26.3 billion (17.5 bil-lion), the federal economics minis-try announced. Following theslump in trade with traditional mar-kets in central and eastern Europe,

companies in Eastern Germanyhave concentrated on expandingtrade with western countries.

The biggest increase was withthe US, where trade grew by 84%and for the first time crossed theDM1 billion ($600 million) level.Russia remains east Germanyslargest trading partner in centraland eastern Europe, accounting for13.8% of exports and 20.8% of im-ports. In total, central and easternEurope accounted for 35.5% of ex-

ports from east Germany and40.8% of imports.

Total exports from eastern Ger-many rose 12.4% to DM13.9 bill ion,but imports went up 18.1% toDM12.5 billion resulting in a slightdip in the regions overall trade sur-plus which stood at DM1.4 billion.east Germanys share of Ger-manys total foreign trade in-creased slightly from 1.7% to 1.9%.

WHOLESALE PRICE:German

wholesale prices rose 0.2% in Aprilfrom March, and fell 1.1% fromApril 1995.


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INDUSTRY SURVEY:A major-ity of French industrialists predictedan upturn of activity in their sectorsfollowing a stabilization of produc-tion in the first quarter, according toInsee, the official statistics agency.The survey showed general gloomabout industrial output, with thenumber of pessimists outweighingoptimists by 21 percentage pointsin April, compared to 23 in March.

But the number of industrialistswho saw improvement in their sec-tor in April surpassed those fore-casting deterioration by 11%. Thiscontinues the improvement fromJanuary, when pessimists out-weighed optimists by 13 points.

The government has forecastgross domestic product will expand1.3% this year, but hopes a sharprecovery in the second half willpush this higher.

EMPLOYMENT:The labor min-istry reported that the number ofjob-seekers fell in March by 2,400to 3,027,400, with most of the re-duction benefiting the young andlong-term unemployed.

But, according to the Interna-tional Labor Organization, whichuses a stricter definition than theFrench government, the joblessrate rose to 11.9% in March, up0.1% from February.

TRADE SURPLUS: Francesseasonally adjusted trade surplusrose to a provisional FFr12.137 bil-lion ($2.33 billion) in March from arevised FFr10.361 billion in Febru-ary. March exports rose toFFr124.887 billion from a revised

FFr118.719 billion in February. Im-ports rose to FFr112.750 billion inMarch from FFr108.358 the monthbefore.

CURRENT ACCOUNT:Frances current account showed aseasonally adjusted surplus ofFFr10.97 billion ($2.13 billion) inFebruary, down from FFr14.32 bil-lion the month befoe. The total forthe two months compares with a

FFr28.25 billion surplus for a simi-lar period in 1995.

CONSUMER SPENDING:French consumer spending fell1.4% in April, due mostly to a sharpdrop in car registrations, the na-tional statistics institute Insee said.

Consumer spending in the retailsector was unchanged in April aftera 2% fall in March. This result wasdue in part to weather-related fac-tors and occurred despite an unfa-vorable number of working days.

Insee said that, in April con-sumer spending on cars fell 7.8%after a drop of 0.2% in March and a2.1% decline in February. Januaryhad seen a rise of 21.8%. Year-on-year, consumer spending in themotor sector was up 3.8% in April.

UNEMPLOYMENT: Australiasunemployment rate shot up lastmonth to almost 9%, its highest

level for more than a year. According to the latest figures from theAustralian Bureau of Statistics, therate reached 8.9% in April in Aprion a seasonally adjusted basiscompared with 8.5% in the previous month. The last time the figure was at this level was in Febru-

ary 1995.

SURGE IN GROWTH: Australias year-on-year economic growthrate surged to 4.8% in the quarteto the end of March - up from jusover 3% in the 12 months to end-December and well in excess omost economists forecasts. However, Mr. Peter Costello, the federatreasurer, quickly reaffirmed thaAustralias new conservative government would push ahead with itsplanned spending cuts - amounting

to around A$8 billion (US$6.2 billion) over the next two fiscal years- despite the stronger than expected results.


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1996 Issue # 6