A Recovery That's Almost Scary

Nobody expected Europe's economies to languish forever. But after the worst recession in 40 years, nobody expected them to rebound quite this high this fast, either. The second-quarter growth and profit numbers tell a story of surprising vigor, with unemployment forecasts creeping down and corporate earnings estimates creeping up all across the Continent. News this good is bound to make people wonder: Can it last?

In Europe's largest economy, policymakers are confident that the recession is history. German Economics Minister Gunter Rexrodt is forecasting 2% to 2.5% real growth this year, double what the government expected as late as January. For once the bullish expectations are more than political cant: Goldman, Sachs & Co. economist Joachim Fels, based in Frankfurt, figures German gross domestic product grew at an annual rate of 6% in the second quarter, triple the first-quarter rate. Initially primed by exports to the U.S., Asia, and Latin America, Germany's recovery has broadened as lower mortgage rates and tax breaks stimulated construction. Germany's strength should have a spillover effect in neighboring economies--some of which have been overdependent on government pump-priming--and a stronger Europe is likely to give U.S. corporate profits a second wind.

But heady growth rates make the inflation bears stand up snarling, and sure enough, interest-rate increases are already being discussed in Britain. Worried central bankers are not the only

potential threats to a long-term European boom. The drooping dollar is biting into profit margins on exports outside Europe. German consumers, who are already spending their savings, face steeper income taxes next year. And political uncertainties loom in all the major economies.

EXPORT BOOM. If you just go by the numbers, though, the good times do seem to be rolling. Germany's growth spurt has already enabled it to halt rising unemployment. Officials at Insee, France's government statistics office, recently doubled their forecasts for French GDP growth to 2% for this year. Italy's recovery, say Turin University economists, will create 200,000 new jobs in 1994 in autos and machinery, which are short on manpower after recessionary job cuts, and in the textile and clothing sector, which is riding the coattails of the export boom.

Signs of quickening growth are myriad. Construction sites in France are humming, with tax incentives driving first-half housing starts up more than 20% from a year ago. German machine-tool and machinery makers have booked over 40% more export orders this summer than last. Thanks to strong exports and booming tourism, Spain is adding 2,000 to 3,000 new jobs a day--in July it had the sharpest fall in its unemployment rate in 17 years.

Business leaders are amazed at the speed of Europe's pickup. "It's coming up faster than we thought," says Ford Trea-

surer David N. McCammon. Ford Motor Co. now expects auto sales to the overall European market to rise by nearly 6.5% this year, to 13.3 million units. Archrival General Motors Corp.'s Adam Opel unit is ramping up production of its small Corsa by 100 cars a day at its state-of-the-art plant in Eisenach, eastern Germany, to fill booming orders. Italy's Fiat, which normally closes plants for a summer furlough, has been producing models such as the small Punto at full tilt through August.

Brisk sales are doing wonders for corporate bottom lines. In Britain, already in its second year of recovery, overall profits soared 18% in the first half of 1994. Now, a slew of Continental companies from KLM Royal Dutch Airlines to German energy outfit Veba are joining the trend. And U.S. companies with big European operations are getting a boost to profits, now harder to come by at home. Machinery maker Caterpillar Inc.'s non-U.S. sales rose 25% in the second quarter, enabling the Peoria-based company to more than triple earnings, to $240 million.

Years of restructuring are finally paying off for a growing number of companies. Dutch giant Philips Electronics racked up first-half net income of $374 million, triple that of the year-ago period. Ford's European operations turned in $244 million in second-quarter profits, vs. a $66 million loss last year. The stronger balance sheets bode well for business spending. Salomon Brothers Inc. economist Jean-Franois Mercier figures French business investment will rise 5% next year, following declines of 8.5% in 1993 and around 1% this year.

DEALMAKING. Another symptom of high-gear growth is renewed activity in mergers and acquisitions. Philips and Anglo-Dutch publisher Reed Elsevier PLC are both hunting in the U.S. And the weak dollar has not prevented U.S. companies from getting in on the action. Boston-based venture capitalist Advent International is scouring Germany and Italy with $600 million ready to invest. Now, Rockwell International Corp. is looking to buy the $225 million semiconductor business of Britain's GEC Plessey Semiconductors Ltd. to supply chips for its growing automotive and avionics business in Europe.

Most Europeans want to believe this turnaround has staying power. "It would take a real financial cataclysm to halt this economic revival," says Albert Merlin, chief economist at French glassmaker Saint-Gobain. Actually, all it might take is a case of inflation jitters. But for now, that seems as distant as last year's recession.


GERMANY Government expects 2.5% growth this year, double its January forecast, with eastern Germany growing by double digits. Latest machine-tool export orders zoom 44%.

FRANCE Housing starts soar 23% in the first half. Analysts forecast business investment will soon resume after two down years.

BRITAIN Second-quarter economic growth hits 3.3%, up from 2% a year ago. Exports, investment, and retail sales all growing.

ITALY Industrial production runs 5.3% over last year, with a 28% rise in autos pacing double-digit gains in metal products and leather goods.


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