European Business News (EBN), 97-01-31

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

Page last updated January 31 1530 CET

CONTENTS

[01] US economy grew at blistering 2.5% pace last year

[02] Air France, Alitalia sign cooperation accord

[03] BskyB joins forces with Carlton and Granada for UK digital TV licences

[04] Sterling is besieged from all sides by nervous investors

[05] Abbey National bids as much as $2.27 billion for Scottish Amicable

[06] Porsche earnings treble in fiscal first half

[07] French unemployment unexpectedly declines in December

[08] Holzmann expects to show break-even 1996 earnings

[09] SAP posts 58% jump in fourth quarter earnings

[10] Davos 1997

[01] US economy grew at blistering 2.5% pace last year

A surprisingly strong 4.7% annual rate of growth in the October-December quarter helped drive last year's expansion, and matched the 4.7% pace from April through June. The previous high was a 4.9% rate in the second quarter of 1994.

Meanwhile the Purchasing Management Association of Chicago index of area business activity fell to 55.9% in January on a seasonally adjusted basis from a revised 57.1% in December, according to a press release. In December, the index fell to 57.1% from 57.6% in November. A reading above 50% indicates expansion in the manufacturing sector and a reading below 50% indicates a contraction. The Chicago survey is watched closely for clues to the index of the National Association of Purchasing Management, out on the the 3rd of Feburary.

With GDP analysts had expected a fourth-quarter rate of just 3.8%. Many analysts predict the economy will brake itself early this year. Still, the sharp growth at year's end raised concerns over whether Federal Reserve policy makers will feel compelled to raise interest rates in an anti- inflation move when they meet next week.

A measure of inflation in the GDP report showed prices paid by U.S. residents rose 2.1% last year, including a 2.5% annual rate during the final three months, up from 1.9% from July through September.

Economic growth of between 2% and 2.5% is considered ideal, since it is believed to permit the economy to safely absorb new entrants into the labour market. Economists say faster growth could trigger price and wage pressures.

In fact, Federal Reserve Chairman Alan Greenspan told Congress last week the central bank is concerned that an economy growing too fast could produce tighter job markets that in turn could trigger demands for higher wages.

So far, he said, job insecurity has eased wage pressures. But he warned, 'At some point in the future, the trade-off of subdued wage growth for job security has to come to an end.' The fourth-quarter surge was paced by large increases in consumer spending and exports. Consumer spending accounts for about two-thirds of the nation's economic activity.

GDP is the total output of goods and services within the United States. It had grown at a 2.1 percent rate in the third quarter, little more than the 2 percent pace in the first three months of the year.

The 4.7% fourth-quarter GDP growth reflected an annualized 3.4% surge in consumer spending, matching the second-quarter pace. Spending had inched up at an anaemic 0.5% rate during the third quarter, the weakest performance in nearly five years.

Exports shot up at a 25.5% rate after falling 0.9% in the third quarter. At the same time, import growth slowed to a 4.7% rate from its 9.3% July- September pace.

[02] Air France, Alitalia sign cooperation accord

'The agreement, leaving both companies their independence for commercial policy and operating costs, involves various essential elements which will be put in place progressively from April 1, 1997,' Air France said.

Air France said it the two carriers would begin a code-sharing and marketing accord in April. The deal will allow the two airlines to co- ordinate flights in France and Italy, as well as adding flights between the two countries.

The French carrier said some routes could be operated under a 'code- sharing' agreement, eventually with direct seat reservations, especially on the routes between Paris, Bologna, Turin and Venice.

Links between French and Italian provinces would be developed, for instance with code-sharing on Alitalia lines between Lyon and Milan and Air France's Strasbourg and Lyon flights on Rome.

The company said the two airlines wanted to re-inforce and extend their partnership.

'The agreement will allow Air France and Alitalia to exploit and optimise all possible synergies between the two companies in France and Italy and other countries, mainly in the fields of assistance and frequent-flyer programmes.

[03] BskyB joins forces with Carlton and Granada for UK digital TV licences

The consortium of Carlton Communications, British Sky Broadcasting and the Granada Group will be known as British Digital Broadcasting. Each company will own 33% of the joint venture.

The group has also reached an agreement with the British Broadcasting Corporation to broadcast up to eight subscription channels.

If successful in winning the three licences, the shareholders have agreed to meet between them a peak funding requirement of up to £300 million ($486 million) with a margin for contingencies. The company is expected to be profitable within five years.

The move is a great boost for the prospects of digital television, which will bring multi-channel television to homes which have not subscribed to cable or satellite.

The U.K. is set to become the first country to launch DTT in the second half of 1998. It will be available through a normal aerial and a decoder, called a set-top box.

There will be six groups of channels, called multiplexes. each carrying five channels at the launch, the statement said. Two and a half multiplexes will be given to the BBC, which is funded by viewers through television licenses, and to other terrestrial broadcasters, while three and a half will be available to successful bidders.

The new joint venture will also link up with the BBC. 'British Digital Broadcasting, with its applications for three multiplexes, intends to offer viewers 15 subscription television channels from Carlton, Granada, BSkyB and the BBC,' the statement said. 'The new subscription channels from the BBC will be a distinctive feature.'

[04] Sterling is besieged from all sides by nervous investors

Worries about the dollar's recent consolidation against the Deutsche mark, domestic political concerns and shifting interest rate expectations - have stolen sterling's thunder for the moment.

The pound has lost five cents and six pfennigs over the past two weeks.

''There was universal buying of sterling in the last few weeks of last year. Now those investors are nervous and looking to take profits while there's a chance,'' said Robin Aspinall, economist at National Australia Bank.

Asked if the pound's rally had come to an end, Jeremy Hawkins, chief economist at Bank of America in London, said 'for the time being, yes.'

However, Hawkins was quick to add that 'at the end of the day, over the next few months the economy will still be performing well and rate expectations will come back again. I think sterling will move back up.'

Late Thursday in Europe, sterling fell two-and-a-half pfennigs against the mark, slipping against the dollar as well. Breaks through stop-loss levels took it to a London close at DM2.6353. It also closed Thursday at $1.6095.

Traders, many of whom have been forecasting a substantial correction in the currency for weeks, blamed the abrupt drop on a large investment fund scaling back long sterling positions.

Hawkins said Friday that position-adjusting, particularly by Japanese investors, and profit-taking on the pound's gains over the past several months, were playing a major role in the currency's decline. However, he said other factors are also serving to pull the pound lower. Early Friday in London, sterling was quoted at DM2.6255 and $1.6013.

For one, traders note that the dollar's recent slip against the mark has dragged sterling lower against the mark as well. After reaching a new 31- month high of DM1.6565 Jan. 28, the dollar has slid back to trade early Friday in London around DM1.6383.

Also, profit-taking by Japanese investors may have been exacerbated, analysts said, by reports this week that Toyota would scale back future British investments if sterling doesn't take part in economic and monetary union.

While Toyota Motor Corp. President Hiroshi Okuda Thursday backed away somewhat from his comments Wednesday, he went on to say that a single currency would be a 'significant advantage' for companies operating in Europe.

Britain hasn't yet decided whether or not it will try to take part in EMU, set to begin in 1999.

Another blow to the pound came early Friday when Britain's National Institute of Economic and Social Research said in a report that sterling's strength will hit exports more in coming months and hold back the country's economic growth. 'The overall growth rate of the economy will be held back by the deterioration in net trade.... We now expect another two years of growth at around its trend,' NIESR said.

The report also suggested that the strong pound will likely keep inflation in check and reduce chances of more interest rate increases in the medium term.

'The net effect of a rise in the exchange rate is likely to be a reduction in output and this is going to reduce the magnitude of inflationary pressures in the economy in much the same way as a rise in interest rates would dampen inflation,' NIESR said.

[05] Abbey National bids as much as $2.27 billion for Scottish Amicable

The offer entails a minimum of £400 million to policyholders and an immediate investment as much as £1 billion into the funds of with-profit policyholders. Abbey's chief executive, Peter Birch, said 'We believe this offer will by very attractive to Scottish Amicable policyholders, providing them with immediate value.'

Scottish Amicable rejected the bid, saying the approach from Abbey was vague and it was unclear how Abbey National was valuing the group.

The insurer said it intends to publish in 10 days time detailed proposals about a twin-phased transformation, involving losing its mutual status on May 1 and a £1 billion pound flotation in three to five years time.

'The start of a growth phase is the wrong time in the cycle for policyholders to put their businesss on the market,' said Sandy Stewart, chairman of Scottish Amicable. When asked if the door was still open for talks with Abbey, a spokesman for the Scottish Amicable said the board has a fiduciary duty to act in the best interests of policy holders.

But he said the company's existing twin-phased proposals were still considered to be the best deal for policyholders.

[06] Porsche earnings treble in fiscal first half

would build more models of its successful Boxster Net profit surged to 36 million Deutsche marks ($22 million) in the six months ended January 31, while sales jumped 20% to 1.7 billion marks.

Unit sales climbed 25% to 12,800, with the Boxster accounting for about a third of the total.

Production of the new model will be expanded to the Valmet plant in the autumn, Porsche said. Customers reportedly have to wait more than a year for delivery of a Boxster. Porsche said it was using the Valmet facility because its own capacity had been reached and it didn't want to increase fixed costs.

The German company also said it still wants to develop a sport-utility vehicle despite breaking off cooperation talks with Mercedes-Benz.

Management board chairman Wendelin Wiedeking said at the annual meeting that the sport-utility vehicle market was one of the fastest-growing in the industry and one that the carmaker would certainly enter.

'We have decided that the Porsche brand would be well accepted' by customers considering whether to buy a sport-utility vehicle, Wiedeking said.

Wiedeking said the talks with Mercedes ended in January because Porsche believed Mercedes wanted to have too strong an influence on the project.

Porsche has been looking for a partner to develop such a car to help it diversify from its dependence on the sports car market with its two models - the 911 and the Boxster.

A Porsche spokesman said the carmaker was now searching for a potential partner to develop a sport-utility vehicle but said previously-announced plans to introduce such a vehicle in 1999 were now unrealistic.

Analysts were upbeat about Porsche's tripled earnings in the first half of fiscal 1997, and its intent to expand production to Finland. By adding to its production capacity, the company will be able to hold new Porsche customers attracted to the less-expensive Boxter model, they said.

'It looks like one of the world's smallest car companies has also been one of the world's smartest in the past few years,' said Karl Ludvigsen, chairman of Ludvigsen Associates Ltd, a London-based consulting firm. He was referring to Porsche's burst of streamlining and restructuring activity launched by Porsche chairman Wendelin Wiedeking.

'I think it's clearly a good move to put assembly in Finland, where they can continue to build the base Boxter model. A value-added version of the car can then be produced in Stuttgart,' Ludvigsen said.

'While there's no room for complacency, I'd say that Porsche's future over the next five years looks absolutely secure and very promising,' Ludvigsen said.

[07] French unemployment unexpectedly declines in December

But the overall unemployment rate remained at a record 12.7% rate, suggesting that it will require more evidence to suggest an optimistic view of the country's economic prospects.

The French labour ministry said the number of jobless fell 0.9% to 3,092, 500 last month, that the number of young people out of work fell a significant 2.1% and those unemployed for more than a year also dropped a little.

At the end of December, 34.2% of those registered with the unemployment agency had been on its books for more than one year, 0.2 percentage point less than in December 1995.

On the year, the number of people registered with ANPE was up 2.9%.

In the course of December, ANPE said the number of people who signed on with the employment agency dropped 0.9% to 352,400 from 355,600. Specifically, it said the number of people registering with the agency at the end of a fixed-term contract or a temporary job continued to decline, falling 2.1% and 5.5%, respectively.

During the same period, ANPE said the number of people leaving its jobless roster rose 1.3% to 356,100. The rise was particularly notable among those who were restarting jobs, among whom the rise was 6.1% while the number taking up internships fell 7.1%.

Finally, ANPE said the number of job offers registered with it was up 3.9% on the month to 206,300, while on the year the rise was 26% in unadjusted terms.

The jobless data came just one day after a survey by the national statistics institute INSEE reported a marked rise in business confidence, which economists read as encouraging, even if it is a measure of sentiment rather than hard proof of any pick-up in activity.

The number of people out of work of 12 months or more fell 0.2%, after a rise of 2.2% the month before, but is still at a high 1.08 million. The number of people aged 25 years is close to 610,000 but fell for both men and women.

[08] Holzmann expects to show break-even 1996 earnings

Chairman Lothar Mayer said the group will continue its restructuring this year, predicting that improvements in purchasing and financial management practices will lead to 'cost reductions which will improve the operating result.'

One of the most conspicuous rationalisation measures will be another 10% reduction in the group's workforce, the third year in a row it has cut its staff by this amount.

Germany's largest construction company said its group construction-related output in 1996 fell just short of 1995's level, but noted that both incoming orders and order backlogs improved slightly.

Holzmann's results are influenced by the widescale liquidation of various real assets and other reserves. Among other things, the group has sold some 4,000 residential units from its portfolio and has sold and leased back the plot of land on which its Frankfurt head office stands.

These measures have been used to offset unquantified operating losses and a number of extraordinary measures worth around billion Deutsche marks ($611 million). The latter include write-downs on shareholdings and provisions against further losses.

Holzmann said its financial position 'clearly improved' in 1996, helped by faster-than-expected marketing of real estate projects and higher advance payments on long-term construction orders. It pointed in particular to a 800 million mark increase in income to 2.5 billion marks from its 'liquid assets and securities.'

It also said two-thirds of the group's projected real estate sales for business years 1996 and 1997 have already been registered.

Analysts, however, were less than impressed. 'The figures are disappointing, which is surprising given that you have to be prepared for everything with Holzmann anyway,' said Christiane Nestroy, an equity analyst with Bayerische Vereinsbank in Munich.

Nestroy dismissed the break-even figures as 'not at all reflective' of the group's underlying business. Indeed, she noted that the scale of liquidations had surpassed her forecasts, prompting her to say she may have to revise deeper her prediction of a 33.50 mark loss per share for 1996. The only bright spot, she noted, was that by taking such a large hit against 1996 earnings, Holzmann may show a clearer improvement in this year's result.

[09] SAP posts 58% jump in fourth quarter earnings

The German software developer said it's now considering raising its annual dividend after the better-than-expected profit for the year. 'I can easily imagine an increase' in the 1996 dividend, said SAP chief executive Dietmar Hopp.

A continuation of the robust growth of the fourth quarter in 1996 would be too much to hope for, however, Hopp said. But he added that SAP would still grow faster than the overall market for 'client/server' business software, which itself continued to grow strongly.

[10] Davos 1997

Bundesbank's Gaddum satisfied with current dollar level

Talking to reporters on the fringes of the World Economic Forum in Davos, Switzerland, Gaddum said he sees 'no reason to talk the dollar up or down', when asked whether the current exchange rate levels represent a certain degree of normality.

Gaddum also said the dollar's recent strength will be discussed at the meeting of G-7 finance ministers and central bank governors Feb. 8 in Berlin.

U.K.'s Clarke says G-7 will discuss currency movements

Speaking at the World Economic Forum's annual meeting at Davos, Clarke said the summit of Group of Seven industrialised nations finance ministers in Berlin Feb. 8 would discuss foreign exchange movements and 'what is happening on the markets worldwide.'

'I am looking forward to an exchange (of views) on the dollar, yen and so on,' Clarke said.

He said 'other things' were on the agenda at Berlin, but had 'not yet focused' on the summit. 'I am very content with the U.K.'s position,' he added, without elaborating.

Meanwhile, he said he had 'no fixed target for sterling.' He refused to comment on the dollar.

Bergsten sees G-7 yen support if Japan stops tax boost

The G-7 joint intervention would be needed, Bergsten said in a speech at the World Economic Forum, to counter the risk of a vicious cycle against the currency in the markets.

Such moves were needed, he said, because there could be a ''sell Japan panic'' should a vicious cycle begin.

''The yen is already far too weak in trade terms and thus will inevitably appreciate sharply,'' Bergsten said. ''But markets pay little attention in the short run to sustainable levels of currencies, so are unlikely to act on that reality.''

Bergsten also predicted that the upcoming European single currency, the euro, will be a strong currency from the outset of its start on Jan. 1, 1999.

Although initial EMU members will likely ''fudge'' Maastricht treaty criteria for membership, such moves will ''add to the pressure for tight monetary policy. It could even create a mild European version of Reaganomics, with very high interest rates and sizeable budget deficits,'' he said.

''The European central bank will place overwhelming emphasis on acquiring immediate credibility as a worth successor to the Bundesbank,'' Bergsten said.

In comments earlier at Davos, Bergsten did warn that the euro could be very volatile against the dollar, but said he expects the currency to be strong as investors shift assets out of dollars into the euro.

UK's Davies says financial risk management must look forward

At a seminar at the World Economic Forum in Davos, Davies said banks now only look at how well they were covered in the past and present. He said banks should be more pro-active and 'stress test their portfolios' against 'possible future market scenarios' instead of simply looking at past risk.

'Today, for example, banks should be asking themselves how they would be affected by a financial crisis in Japan or by a decision not to proceed with economic and monetary union on the current timetable,' Davies said. 'These events are not probable, but they are within the realms of possibility, and should therefore be encompassed in stress testing of portfolios.'

He also said the Bank of England is focusing special attention on credit risk management since credit problems remain the chief reason for bank failures. And it also plans to publish a paper next month on how pay and bonus packages at financial institutions encourage employees to take risk.

He said regulators should strive to make cooperation an 'instinct, not an obligation,' and that a single regulator to conduct consolidated supervision across markets is desirable.

South Africa's central bank sees slower growth

He said the 1997 growth decline will be 'a short slump' and that he expects growth to exceed 2.0% in 1998.

Olivetti official urges company to find new partner

He said Olivetti has already had some 'contacts' on the matter but no negotiations currently are taking place. His comments come one day after Compagnie Industriali Riunite, the holding company of Italian businessman Carlo De Benedetti, said its stake in Olivetti has fallen to 9.3% from 12.8% at the end of December and 14.5% at the end of June 1996.

Garuzzo downplayed a recent suggestion by an executive at Mediaset - the broadcast company controlled by Silvio Berlusconi's Fininvest - that there could be a link between the two groups, saying: 'I don't see anything there.'

He declined to comment on the earnings outlook for Olivetti, two days after the company forecast a 1996 pretax loss of around 800 billion lire, down from a loss of 1.6 trillion lire in 1995.

Olivetti recently sold its personal computer unit, which had accounted for most of the 4.7 trillion lire in losses racked up over the 1989-1995 period. Olivetti is now looking to focus on information services, systems management, its Omnitel cellular phone unit and computer printers.

Garuzzo wouldn't comment on some analysts' forecasts that Olivetti won't make a profit before 1998.

He did say that the company's debt level, which stood around 1.7 trillion lire at year-end 1996, was lower than other large telecoms groups making similar large investments.

Summers warns of hubris, business cycles

Asked by AP-Dow Jones whether he was echoing a warning against a stock market 'bubble' last month by Federal Reserve Chairman Alan Greenspan, Summers said: 'The words speak for themselves.'

Summers, speaking at the World Economic Forum, also said governments, particularly in Japan and Europe, 'can't lose sight of seeking steady demand', but again didn't expand on those remarks.

In looking toward the future, Summers said leaders should remember that there still is a need for a strong state in order to push through social reform, and oversee education and defence.

He also warned against the trend in some countries to associate the growing cleavage between rich and poor as a result of globalisation.

'The volume of trade between high- and low-wage countries is not large enough to account for the trends that cause concern,' Summers said. He noted that U.S. trade with low-wage countries over the past 20 years accounted for less than 1% of gross national product.

EBN's Denis O'Callaghan will be interviewing Summers today in World Market Outlook at 1900 CET.

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