European Business News (EBN), 97-07-29

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

Page last updated Tue, July 29 5:43 PM CET

CONTENTS

[01] France's June consumer spending drops 2.9%

[02] Germany's May trade surplus narrows

[03] UK June consumer lending rises $2.2 billion

[04] Clinton, Republican congressional leaders reach tentative budget agreement

[05] US reports second quarter employment cost index up 0.8%

[06] GrandMet's Burger King pulls out of France

[07] BMW posts 30% surge in profit

[08] Abbey National profit jumps 23% in first half

[09] Dresdner Bank first half operating profit jumps 23%

[10] Degussa expects 1997 profit to exceed previous year

[11] Pharmacia & Upjohn posts 34% drop in second quarter net earnings

[12] MCI pledges to encourage telephone competition in UK

[13] EU clears Thyssen, Krupp to form joint venture with some of their steel activities

[14] Corporate and Economic Briefs

[15] World News Briefs

[01] France's June consumer spending drops 2.9%

Economists said the figures struck a blow at the government, which is attempting to get its finances in order for the single currency by stimulating economic growth. But they also pointed out that the latest figures had been adversely affected by a relatively small number of crucial Saturday shopping days, poor weather and a late start to summer discount sales at department stores.

Several economists predicted a pick-up in July, saying the discount sales appeared to have gone well and that a big drop in car sales since the ending of car-buying incentives may have bottomed out.

Stuart Thomson, economist at Credit Agricole Indosuez, said the drop showed household consumption had fallen in the second quarter and that the year had got off to a slow start. 'Taking into account the bad weather and the working days factors means it is clearly not as bad as it first appears, and we should see a rebound in July and August,' he said.

'But the problem is political as (the government) will have to base its tax estimates (for the 1998 budget) on these figures. The government's desire for a consumer-led recovery has certainly been dented and it does make its task of reaching 3% (deficit as percentage of GDP) next year more difficult, ' he said.

The government revealed the results of an audit of public finances on July 21 which showed the public deficit heading for 3.5 to 3.7% of GDP this year.

Finance Minister Dominique Strauss-Kahn at the same time unveiled a 32 billion franc ($5.2 billion) package of corporate tax hikes and other savings to knock 0.4 percentage points off the deficit and bring it closer in line with the Maastricht treaty criteria for monetary union.

Strauss-Kahn says France's 1998 budget, to be presented in September, will be drawn up with the goal of getting the deficit down to 3% next year.

[02] Germany's May trade surplus narrows

April's trade data remained unrevised. Germany's current account, meanwhile, swung to a deficit of 2.5 billion marks in May compared to a surplus of 3.2 billion marks in April. April's surplus was revised from the 2.8 billion marks previously reported.

German exports in May were 9.7% higher than in May 1996, the statistics office said, while imports were 10.3% higher than in the same period the previous year.

The trade and current account balances contracted somewhat more than economists had expected. A survey of economists by Dow Jones prior to the data's release put average trade estimates at a surplus of 10.1 billion marks, and the current account at a surplus of 200 million marks in May.

In the first five months of 1997, Germany's trade surplus totalled 44.6 billion marks.

Exports during that period totalled 346.8 billion, up 8.7% on the same period a year earlier, while imports totalled 302.2 billion, up 6.7% from the first five months of 1996.

The current account surplus, meanwhile, totalled 7.8 billion marks in the months from January through May, compared with a deficit of 5.7 billion marks in the first five months of the previous year.

[03] UK June consumer lending rises $2.2 billion

The June figures had been expected to show weaker demand for credit as cash received from building society flotations was used to repay debts. They indicated stronger demand instead, suggesting that consumers are confident about taking on more credit and that the windfall-related spending shows no sign of abating.

Net lending to UK consumers rose £1.3 billion ($2.2 billion) in June, accelerating from a revised £1.2 billion in May and above the £1 billion forecast by economists surveyed by Dow Jones.

Economists say the data contain little to suggest that windfall payments received from the conversions to bank status of Alliance and Leicester and Halifax in recent months have damped consumers' appetite for credit. But the buoyancy of non-credit-card lending suggests that a 7.5% surge in sales of household goods in the month was not financed by windfalls alone.

Repayments - the difference between gross and net lending - rose sharply in June, indicating that consumers were using part of their windfall funds to pay off existing debts.

'These consumer-credit numbers provide another reminder of just how strong activity on the consumer side is becoming,' said Dharshini David, UK economist at HSBC Markets.

'The June data coupled with the upward revisions (to May's figures) paint a stronger picture of consumer credit than was hitherto thought,' said Phil Shaw, economist at Investec Bank. 'The windfall effect is clearly driving High Street activity, but the question remains whether this is transitory or could lead to a long-lasting shift in consumer spending.'

The data increase the pressure on the Bank of England's monetary-policy committee to raise official interest rates when it meets Aug. 6-7. 'They are likely to up the pressure for a further hike in base rates, if not at next month's meeting, then soon afterward,' HSBC's David said.

[04] Clinton, Republican congressional leaders reach tentative budget agreement

Ready to remake the face of government, the Clinton administration and Republican congressional leaders all but sealed a landmark deal to cut taxes, balance the budget and overhaul the government-funded health insurance programme for the elderly.

'We gave ground. The administration gave ground. And we found common ground, ' a happy Senate Majority Leader Trent Lott said as the two sides announced a tentative accord.

'We couldn't be more pleased with the outcome,' said White House Chief of Staff Erskine Bowles, the administration's point man during a secretive final few days of bargaining. President Clinton, who was out of town when the agreement was announced, was flying back to Washington where he is expected to bestow his blessing on the deal.

The tax breaks would principally benefit families with children, students and investors - although there would be significant new opportunities for Individual Retirement Accounts.

Tax and spending cuts aside, the agreement also establishes a new programme of coverage for children currently without health care. Tobacco taxes would rise to help finance the programme.

All sides described the agreement as tentative, subject to the drafting of official legislation.

[05] US reports second quarter employment cost index up 0.8%

The Employment Cost Index for June 1997 was 132.8 (June 1989=100), an increase of 2.8% from June 1996, the Bureau of Labor Statistics reported today. The ECI measures changes in compensation costs, which include wages, salaries, and employer costs for employee benefits. The index is important as it's monitored by Federal Reserve officials for signs of rising wage pressures.

'The number came in right as expected,' said Mark Sauvigne, government trader at Chase Securities in New York. 'I think the market will stay in a trading range. It's not ready to break out, as we haven't found new buyers at the higher levels,' he added.

Economists surveyed by Dow Jones Newswires predicted the ECI would show an 0.8% gain for the second quarter. Estimates ranged from a low of 0.6% to a high of 0.9%.

Three-month increases in compensation costs have ranged from 0.6 to 0.9% for the last 4 1/2 years. Wages and salaries also increased 0.8% during the March-June 1997 period. The increase for the December 1996-March 1997 period was 0.9%. Benefit costs increased 0.6% in the March-June 1997 period, about the same as the quarterly increases from March-December 1996. In December 1996-March 1997, these costs increased 0.1%.

Compensation costs for private industry workers increased 0.8% during the March-June 1997 period. Over the past four years, quarterly compensation increases have ranged from 0.6 to 0.9% in private industry. Wages and salaries increased 0.9% in June, the same as in the March quarter. Benefit costs increased 0.7% in June; in March, benefit costs were unchanged. These benefit cost changes were identical to those recorded for the March and June quarters in 1996.

Compensation costs for state and local government workers increased 0.5% in the March-June 1997 period, the same increase as in the previous quarter. Wages and salaries, which have increased at three-month rates of 0.6 to 0.9% for the last 4 1/2 years, rose 0.6% in the March-June 1997 period. Benefit costs increased 0.1%, down from the 0.5% recorded in the December- March quarter.

[06] GrandMet's Burger King pulls out of France

A spokeswoman for the fast food chain said 'the French restaurants are no longer profitable for us.' Burger King said it is leaving France because of its size, relative market position and sustained low level of profitability.

The company has agreed with the French Franchise Association that most of the franchised restaurants will cease operating as Burger King by the year- end. The move follows a comprehensive review of BK's operations in Europe. It plans to grow the business in Europe with its main efforts focused in the UK, Germany and Spain where BK's brand has strong market positions.

In Europe and the Middle East, Burger King plans to open 167 restaurants this year and 184 more next year. The move was heralded in Grand Met's interim results when it reported a decline in same store sales in France.

[07] BMW posts 30% surge in profit

BMW also said that group sales increased to 29.1 billion marks, up from 25.2 billion marks last year.

Group deliveries during the first half of the year rose to 'around' 600,000 units. That figure includes BMW, Rover, MG, Mini and Land Rover models.

The figures are close to the expectations of analysts surveyed by Dow Jones. On average, analysts expected BMW to report a rise in net profit to 444 million marks, a rise in group sales to 29.1 billion marks, and group deliveries of about 590,000 units.

BMW also said that it expects group sales and profit for the full year of 1997 to surpass 1996. BMW wasn't immediately available to say whether it's referring to pretax or net profit.

In 1996, net profit rose to 820 million marks, while group sales totaled 52.3 billion marks.

[08] Abbey National profit jumps 23% in first half

Abbey National said it has achieved its goal to derive at least 50% of profit from non-traditional lines of business, such as life insurance, consumer credit and Treasury - more than two years ahead of schedule. The U.K. bank showed non-traditional activities represented 51.2% of profit.

The figures exclude a leasing charge of £67 million arising from the proposed change to the rate of corporation tax announced in the June 2 budget.

'We've been closing on the goal for the past year,' said Charles Toner, deputy chief executive of Abbey National in an interview with Dow Jones. 'With the mortgage and savings market more mature, we've put our effort into building the other income streams.'

In its U.K. retail banking division, profit rose 14% to £335 million compared with £294 million last year. However, it was Abbey National's general insurance unit that posted the biggest growth - a 62% increase in profit to £47 million from £29 million in 1996.

'Our joint venture with Commercial Union is working well,' Toner said. 'We've been working on consolidating all our general insurance business into this joint venture, and in the last few months have been concentrating on targeting our non-borrowing customer base to sell household and contents insurance.'

On the life insurance side, Abbey National said profit rose 32% to £82 million from £62 million a year ago. Toner also indicated the bank will focus more on organic growth following its unsuccessful bid to buy Scottish Amicable Life Assurance Society in the first quarter.

[09] Dresdner Bank first half operating profit jumps 23%

Dresdner said its operating profit rose to over 1.7 billion Deutsche marks ($1 billion) from 1.42 billion in the year earlier, just above analysts' average expectations of a rise to 1.67 billion marks. Dresdner said it was 'very satisfied' with the result, but warned that second-half performance may not match the impressive first half.

'It wouldn't be appropriate to extrapolate this good result for the whole year,' the bank said in a letter to shareholders, distributed ahead of a press conference.

The good results from trading and commissions, which rose 50% and 34% respectively from year-earlier levels, was offset by a rise in risk provisions.

Gross provisions against possible loan losses rose 20% to 611 million marks. Meanwhile, cross-compensation from profits on liquid reserves fell 26%, which resulted from lower income from the sale of minor shareholdings.

Adding further fuel to banking merger speculation but putting early pressure on its share price, Dresdner also said it planned to raise its base capital by 120 million marks by issuing new shares in the ratio one for 20 held.

'With this step, we will in particular broaden our scope for strategic moves,' Dresdner said

[10] Degussa expects 1997 profit to exceed previous year

The German chemicals and trading concern didn't specify whether it meant pretax profit or net profit.

Degussa also noted that its group pretax profit in the third quarter rose 38% to 141 million marks ($S78.3 million).

In a breakdown of sales in the first nine months, Degussa said chemical products sales rose by 11% to 3.2 billion marks due to volume gains and the favourable exchange rate, while prices were overall marginally lower. It particularly noted its silicas and chemical catalysts division.

Meanwhile, its segment health and nutrition improved by 13% to 2.3 billion marks. Here, Degussa said that earnings grew 'significantly,' mainly due to the feed additives and dental divisions. Sales in the Asta Medica group were below the year-earlier period due to continuing weak business, Degussa noted.

In the segment precious metals and banking, sales excluding precious metals trading and adjusted for consolidations were on last year's level. Earnings improved due to the absence of restructuring costs which had dragged down the year-earlier earnings.

[11] Pharmacia & Upjohn posts 34% drop in second quarter net earnings

In the first three months to June 30, sales fell 4.1% despite continued sales growth of its Xalatan and Camptosar products. In the third quarter of 1997 the company plans to take a charge of 10 to 16 cents per share for the merger between Pharmacia Biotech and Amersham Life Science, investor relations spokesman Lars Ousback confirmed in connection with the earnings report.

For the second quarter P&U's earnings per share stopped at $0.34, down 33% from the year earlier period and falling short of market expectations of around $0.38 per share. Pharmacia & Upjohn cited currency impact and increasing competition as the main reasons for the decrease in its second quarter earnings per shate.

The company said 'adverse currency exchange developments reduced sales by 6%, as the U.S. dollar continued its strength against other currencies.' For the rest of the year, Pharmacia & Upjohn's Chief Executive Officer Fred Hassan foresees that 'negative sales and earnings trends seen in the first half are likely to continue through 1997.'

'While 1997 is a clean-up year, 1998 should be a turnaround year,' Hassan said pointing out that 'early action steps are being taken to enhance revenues and reduce general and administrative costs. 'We look forward to seeing a better-run operation that effectively capitalizes on significant innovations such as Detrusitol, for urinary incontinence,' the chief executive said.

Hassan said the major restructuring of the company, which was announced earlier in July, will be implemented through the rest of the year.

'The company anticipates announcing the costs and cost savings associated with these actions during the second half of the year,' he said.

[12] MCI pledges to encourage telephone competition in UK

MCI told regulatory officials that it would allow BT to complete calls to the US only if BT complied with a European Union rule allowing customers to choose alternate carriers easily. The rule would stop BT customers having to enter a separate code to access other carriers, which they have to do at present.

This makes it harder for rivals to compete, and could be the final sticking point for approval of the BT / MCI merger. Approval of the deal is now expected in August.

'On the surface this should help US companies compete in the UK,' said Jeffrey Kagan, an analyst with Kagan Telecom Associates in Atlanta. 'It should go a long way toward alleviating concerns of competitors in doing business over there.' AT&T had no immediate comment, a spokesman said.

With this pledge and previous commitments made by the companies, 'I personally believe we can and should approve the BT/MCI merger as in the public interest,' FCC Chairman Reed Hundt said.

Those other commitments include making access to trans-Atlantic cable available to competitors; reducing rates to complete international calls between the US and the UK; and the recent decision by the British government to give up a special share it holds in BT.

If the EU and the UK don't implement provisions making it easier for customers to switch carriers, MCI's pledge no longer stands, said an FCC official, speaking on condition of anonymity.

MCI's merger plan still must be approved by a majority - three - of the FCC's commissioners. An FCC official said the commission is expected to approve the transaction by the end of August.

[13] EU clears Thyssen, Krupp to form joint venture with some of their steel activities

The venture will be the leading producer of hot-rolled and cold-rolled flat steel products in the 15-nation EU, the Commission noted.

The new company - called Thyssen Krupp Stahl - combines their businesses in the production and sale of unalloyed flat steel products, as well as their activities in the fields of steel service centres, transport services, production of steel tubes and tailored blanks for automobile manufacturers, as well as trade in fertilizers.

Thyssen has a 60% stake in the venture while Krupp Hoesch holds the remaining 40%.

The Commission said its inquiry showed 'the operation won't give the companies any power to fix prices or to block effective competition.'

It also noted that competitors such as France's Usinor Sacilor, British Steel, Luxembourg's Arbed and Belgium's Cockerill Sambre would also ensure Thyssen Krupp doesn't gain a dominant position in the market.

[14] Corporate and Economic Briefs

Chubb Corporation made an operating income, before realized investment gains, of $175.6 million, or $1.01 a share, in the latest second quarter compared with $156.8 million, or 89 cents a share, a year earlier. Earlier in 1997, the company sold its life insurance business. The life insurance business is reported as discontinued operations in the year-ago second quarter. Chubb Corp. said net premiums written in the latest second quarter were $1.37 billion compared with $1.26 billion a year earlier.

Belgium's year-to-year inflation was a preliminary 1.89% in July compared with 1.74% in June, the Belgian economics ministry said. The Ministry for Economic Affairs said July's preliminary inflation was led by increases in the costs of overseas travel, potatoes, fresh fruit and vegetables, vacation homes and coffee.

Finnish telecommunications company Nokia said it has gained an order worth around £100 million ($169 million) from U.K. mobile phone network operator Cellnet. The order includes the expansion of Cellnet's GSM digital network with deliveries taking place until the end of 1998, Nokia said. Nokia will supply base station controllers and its modular digital base stations, as well as providing expansions, to the existing network management system.

Inflation in South Africa showed further signs of slowing with the consumer price index, rising 8.8% year-on-year in June, compared with an increase of 9.5% in May, the government's Central Statistical Service said. The CPI rose 0.3% in June over May. Economists, on average, were expecting inflation to grow an annualized 9.1% in June.

[15] World News Briefs

Hundreds of soldiers, assisted by helicopters, staged a spectacular overnight operation to prevent the total collapse of a dike in flood-hit eastern Germany, officials said. A team of 700 soldiers and relief workers battled through the night to shore up a six to seven metre (yard) section of the dike, which had collapsed and nearly caused a total break in the dam on the Oder River near the village of Hohenwutzen. Chancellor Helmut Kohl was scheduled to interrupt his summer holiday later on Tuesday to visit the region, where officials said the situation remained critical.

The Taliban Islamic army held fast at its positions outside Kabul, despite fierce fighting north of the Afghan capital that sent waves of villagers fleeing. Opposition forces have punched through successive Taliban defense lines north of Kabul in the last week, taking strategic cities and the Baghram air base until finally coming within rocket range of the capital. But the opposition onslaught appeared to have stalled in Shakardara, a village eight miles (15 kms) north of Kabul, where fighting raged through the night Sunday.

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

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