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European Business News (EBN), 97-01-21

European Business News (EBN) Directory - Previous Article - Next Article

From: The European Business News Server at <http://www.ebn.co.uk/>

Page last updated January 21 1730 CET


CONTENTS

  • [01] German business climate continues to deteriorate
  • [02] Rate cuts will not solve Germany's stubborn unemployment
  • [03] Greenspan sees few `inflationary pressures'
  • [04] Nestle sales gain 7.1%, bolstered by currency rates
  • [05] Nissan to build third car model for European market
  • [06] Sterling's strength hits UK exports
  • [07] Degussa shows 20% gain in first quarter profit
  • [08] Sulzer to sell 25% of Medica unit to public
  • [09] Airbus is confident of market demand for large jetliners

  • [01] German business climate continues to deteriorate

    Business confidence in western Germany is continuing to deteriorate following a long upward trend that ended in November.

    The the Ifo Institute for economic research said its main index of western German business sentiment dropped nearly a full point in December to 95.8 from 96.9 in November. It was the second monthly drop in a row. The index had peaked in October at 97.3 after a long upward run.

    The research institute's two sub-indices showed that western German business's assessment of current conditions deteriorated more than its assessments of future prospects.

    The current conditions sub-index fell to 89.8 in December from 91.4 a month earlier, while the business expectations index fell to 101.8 from 102.4 in November.

    There was no indication from the Ifo institute as to why confidence fell off in December.

    In eastern Germany, the deterioration in sentiment wasn't as pronounced. The main confidence index edged down to 104.4 from 104.8 in November.

    Of the two eastern German sub-indices, the assessment of current conditions fell to 120.9 from a downwardly revised 122.5 in November, while the assessment of business prospects actually rose to an index level of 89.7 from an upwardly revised 89.5 a month earlier.

    The institute originally reported a current conditions sub-index of 122.7 and a prospects sub-index of 89.4 for November.

    The following are basic German annual economic statistics, in percentages, with most-recent forecasts as provided either by the government or multilateral agencies:

                           1994    1995     1996    1997
    GDP Growth              2.9     1.9      1.4    2.25-2.50
    Inflation (CPI)         2.7     1.7      1.5    1.6
    Budget Deficit/GDP      2.6     3.5      3.9    3.0**
    Public Debt/GDP        50.4    58.1     60.5   61.5
    Unemployment (in mlns)  3.7     3.6     3.97    4.1
    
    ** Finance Minister Theo Waigel has stressed that Germany's budget to GDP ratio will be 2.5% in 1997, but many economists predict it will be higher than 3.0%, possibly even 3.5%.

    [02] Rate cuts will not solve Germany's stubborn unemployment

    Germany's unemployment problem can't be solved by cutting official interest rates, warns Deutsche Bundesbank council member Helmut Hesse.

    Hesse, who is head of the regional central bank based in Hanover, echoed statements made last week by fellow council member Hans-Juergen Krupp, saying that unemployment is the 'toughest problem of the German economy' and added that 'monetary policy mustn't turn its back' on it.

    But he explained at length that interest rates are neither the cause of the problem nor the answer to the problem and warned that the Bundesbank's 'ability to help cut unemployment in 1997 without causing serious problems in other areas of the economy is very limited.'

    Hesse also observed that a cut in official German interest rates wouldn't necessarily spur investment either. He noted that five-year mortgage rates under 6%, commercial credit rates at around 7.5% and rediscounted credit rates of some 4.7% ought to have been enough to act as a powerful encouragement to investment, but haven't. 'It's doubtful whether further declines in bank lending rates could bring the desired boost to investment, ' Hesse argued.

    Long-term interest rates have traditionally had greater importance for the German economy since over 80% of credit to the real economy is tied to long rates.

    However, Hesse still maintained that the weakness of demand in the German construction sector could still lead to a decline of up to 0.75 percentage point in long-term mortgage rates. Mortgage rates in Germany usually show a strong correlation to government bond yields.

    [03] Greenspan sees few `inflationary pressures'

    Although stock markets across the world nervously awaited the comments of Federal Reserve Chairman Alan Greenspan, it turned out they had little to fear. The Fed chief quickly calmed their jitters as he told the Senate Budget Committee that he sees little 'inflationary tensions' in the U.S. economy.

    With memories still fresh in the market's minds of the December speech in which he rocked the stock market with his suggestion that stocks might be overpriced, there had been worries that the Fed chief might tighten monetary policy in an attempt to constrain equity gains.

    However, he did urge lawmakers to get the nation's fiscal house in order, saying a lack of budgetary reform in the years ahead would do 'monumental' damage to the U.S. economy. He saw 'no reason' to doubt the budgetary assumptions made by the Congressional Budget Office with regard to the growth of the Federal deficit in the years ahead.

    Saying that the projections 'don't seem unreasonable,' Greenspan predicted the health of the economy would be greatly enhanced by continued progress toward balancing the budget. Greenspan again urged lawmakers to look beyond their goal of balancing the budget by 2002 and instead said Congress should look at the bigger picture of enacting legislation to balance the budget.

    [04] Nestle sales gain 7.1%, bolstered by currency rates

    Good sales figures for 1996 have prompted Nestle into an upbeat assessment of the year ahead. The Swiss food giant posted a record last-year revenue of 60.5 billion Swiss francs ($43 billion), noting that volume gains teamed up with the weakening Swiss franc to boost global turnover.

    Futhermore, the company forecast sales volume would keep growing. 'Barring adverse currency developments, the group should therefore register another increase in sales and profit,' it said in a statement.

    Although the company's statement failed to provide profit figures for 1996, it did say net profit growth should outstrip the rate at which sales increased. Nestle partially attributed the expected profit rise to more favourable exchange rates.

    'For the first time since 1993, exchange rates had a moderately positive effect of 1.4%,' Nestle said. 'Sales volume growth, excluding acquisitions and disinvestments, was 2.7%.'

    Looking at sheer sales growth, the company said the Asia/Pacific region, Africa and the Middle East all showed strong volume growth. Growth was above average in Europe, largely as a result of rapid expansion in central and eastern Europe.

    'In the Americas, Latin America achieved above-average growth, whereas the U.S. market's overall growth did not live up to expectations, particularly due to transitional problems in the beverage division,' it said.

    Analysts were mostly favourable in their reviews, although some suggested Nestle should have done even better given the weakening franc.

    [05] Nissan to build third car model for European market

    Nissan Motor said it plans to build a third model for the European market at its U.K. plant, investing an additional £215 million ($357 million).

    The No.2 Japanese auto maker said that the production of a compact car in the 'C sector' - the biggest market segment in the European auto market - will enable the company to build more than 90% of cars it sells in Europe before the turn of the century.

    'We are determined to improve our performance in Europe's biggest market segment,' company president Yoshikazu Hanawa said.

    A Nissan spokesman said that the model for new production will be the successor of the Almera compact car, which is currently exported from Japan. In terms of size, the Almera comes between the Micra compact and the Primera sedan that Nissan currently builds at the Sunderland plant.

    As the biggest player in Europe among Japanese car makers, Nissan sold 433, 392 vehicles in the region last year, down 1.5% from a year earlier. While locally-built vehicles accounted for more than 70% of the sales, the rest - including more than 100,000 units of the Almera - were shipped from Japan. Nissan also has a smaller production facility in Spain.

    The company hopes the addition of the new model will boost the production at Sunderland to above its capacity of 300,000 units. The 1996 output there was roughly 232,000 units.

    The new project will create 800 new jobs at the Sunderland plant. It is also expected to add 4,000 jobs among the company's suppliers in Europe, as spending on local components is slated to rise by £350 million.

    [06] Sterling's strength hits UK exports

    The strength of the pound, which has risen in value by nearly a fifth against the Deutsche mark since last summer, has started to undermine British exports, according to a leading business survey.

    The Confederation of British Industry's quarterly industrial trends survey showed the proportion of manufacturers reporting lowered demand outnumbered those reporting higher demand by one percentage point. This was the first time that export demand has leveled off since October 1993.

    Although export orders are expected to pick up slightly in the next four months, manufacturers' optimism about export prospects for the year as a whole fell for the first time since October 1993.

    Over the coming four months, the CBI survey showed manufacturers expect prices to be the most important factor limiting export demand. 'The impact of sterling's strength is beginning to feed through to manufacturers' export orders,' said Ross Buckland, a member of the CBI's Economic Affairs Committee and Chief Executive of Unigate.

    'Companies are becoming concerned about the export outlook and this is reflected by the fall in optimism about export prospects and the rise in the proportion of companies reporting that prices are a constraint on their ability to win export orders.'

    [07] Degussa shows 20% gain in first quarter profit

    German chemicals and metals group Degussa said pretax profit jumped 20% in the first quarter ended December 31, confirming the company's forecast that business conditions would improve.

    Still, the company said profit growth for the year will likely fall short of the first quarter pace.

    For all of fiscal 1996, the company showed just a 2% rise in earnings.

    Sales in the first quarter climbed 16%, or 6% when precious-metals trading is excluded.

    'If there is no unforeseen worsening of the world-wide economic climate then we expect ongoing positive developments and a continued rise in earnings in 1996/1997,' management board chairman Uwe-Ernst Bufe said.

    'Overall we are positive for the newly begun 1997 year,' he said.

    The company said it expects an improvement in domestic business during the year.

    [08] Sulzer to sell 25% of Medica unit to public

    Sulzer Technology said it will take its Sulzer Medica unit public.

    The initial public offering will involve around 25% of the unit, which makes medical prostheses and has annual sales of around 1.2 billion Swiss francs ($847 million).

    Initial estimates of analysts valued Sulzer Medica at around 3 billion Swiss francs. The floatation of Sulzer Medica appeared to represent an effort to separate the high-flying medical implant unit from the lackluster industrial operations.

    Analysts estimate Sulzer Medica has become the cash cow for the Sulzer group, whose old-line industrial units produce little return or losses. Sulzer Medica generates more than 90% of the entire company's earnings before interest and taxes, while accounting for less than 20% of total sales.

    Sulzer said the stock floatation will provide Sulzer Medica 'with the same access to capital resources as its main U.S. competitors.' The company added that proceeds from the sale will be used exclusively by Sulzer Medica for internal expansion and acquisitions.

    Sulzer said details of the IPO will be released in the Spring. The company said the medical unit will get a new identity. Sulzer said it will strive to improve its industrial units by focusing on 'value-added' products.

    [09] Airbus is confident of market demand for large jetliners

    Airbus Industrie said it is continuing its studies of a 555-seat jetliner despite Boeing's surprise decision to cancel plans for a larger, longer- range versions of its 747 jumbo jet.

    Boeing said it was cancelling its plans for a 747-X because of spiralling development costs that could have topped $7 billion and insufficient interest in orders from airlines.

    Both aircraft builders have been sizing up future aircraft in the market for planes carrying 500 or more passengers as much as 10,000 miles.

    Airbus, however, said it was confidently pressing ahead with studies on a 555-seat passenger plane.

    Boeing said that market conditions did not justify the risk and expense of building the new version of its 747 jumbo jet, and that it was diverting half the 1,000 staff on that project to smaller planes.

    But an Airbus spokesman said 'the signs from major airlines working with us on shaping the A3XX are definitely encouraging.'

    Airbus says airlines want an all-new plane rather than Boeing's 747-X, which the Airbus spokesman said was the 'end of the line for a product developed in the late 1960s'.

    Airbus wants to grab at least half of the aircraft market by the end of the decade, up from its estimated historic share of 35%. But it lacks large planes to compete with Boeing's 777 giant twinjet and the best-selling 747 jumbo.

    Airbus forecasts a market of 1,383 planes seating more than 400 passengers over the next 20 years, while Boeing believes demand would only stretch to 470 planes seating 500 or more, which would not allow it to get a return on its money.

    A basic A3XX would cost around $200 million, giving potential sales worth more than $275 billion on the Airbus forecast.

    'A split market would have been a big challenge for two manufacturers but now that Boeing is opting out, that enhances our prospects,' the Airbus spokesman said.

    For Boeing, the move won't have any immediate effect on employment or earnings because its remaining airplane business is so strong. In fact, the decision will have a short-term benefit in that it will reduce development costs and allow Boeing to devote more money to developing other planes. But longer-term, Boeing runs a greater risk of being shut out of a potentially lucrative market.


    From the European Business News (EBN) Server at http://www.ebn.co.uk/


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