Europe's `Steady Creep Out Of The Doldrums'

When Daimler Benz Chief Executive Edzard Reuter announced company results to a recession-weary crowd on May 19, he was downright jolly. "The dry spell has come to an end, just as we said it would," he reported. "This means that earnings prospects at Daimler Benz are clearly on the upswing." Indeed they are: Profits at Germany's biggest industrial company spurted 14% in this year's first quarter on a 16% jump in sales.

Call it the quiet recovery. From Amsterdam to London to Zurich, some signs of an economic comeback are sprouting. Corporate profits are providing happy surprises in such key industries as autos. And in the steel and high-tech sectors, where growth will likely remain meager, there is at least the sense that the worst is over. "What we're talking about is a steady creep out of the doldrums," says Deutsche Bank chief economist Norbert Walter.

But stock markets, a leading indicator, tell a more upbeat story. They're betting on a solid recovery, despite still mixed economic signals. London hit a record high in mid-May, Frankfurt is at its highest level in 20 months, and Paris recently touched a two-year high. And even Deutsche's Walter concedes that the European economy now has the potential to grow midterm at a respectable 3% clip without much inflation. That's because Europe's two years of painful corporate restructuring are starting to pay off.

EASTERN EXPANSION. Take Daimler. The company took write-offs last year that reflect a major reshaping: $635 million close-down costs for getting subsidiary AEG out of the typewriter and communications-systems business. As a result, Daimler's profits last year rose a modest $90 million, to $1.2 billion on sales of $58 billion. But Daimler is confident margins will be a lot fatter this year. Indeed, Reuter is bragging that group operating profits--an internal number that's never disclosed--will more than double.

Consumer spending may be bouncing back, too. In the first quarter, profits at French auto maker Renault increased nearly eightfold, to $440 million, on a 19% increase in sales. That's spilling over into other auto-related areas. In Italy, Marco Tronchetti Provera, who recently took over as CEO at tire and cable manufacturer Pirelli, sees the beginnings of an improved market. His company has broken even during the first four months of this year after consolidated losses of $500 million in 1991. And in Britain, J. Sainsbury PLC, a supermarket chain, reported a robust 21% jump in first-quarter earnings.

Europe is also benefiting from a strengthening U.S. economy that is sucking in imports. Exports of fiberglass and other building materials to the U.S. are up at France's Saint-Gobain. And at German drugmaker Bayer Group, U.S. sales are also rising. "We have reached the bottom of the valley," says CEO Hermann J. Strenger.

Germany's massive spending effort to rebuild the east is adding to corporate order books. Booming sales to the east helped lift profits at electronics giant Siemens by 8% in its fiscal first half. It's forecasting a 10% sales gain in the full year. Public-communications systems, power generating, and medical technology activities all showed strong sales gains. Even so, Chief Executive Karlheinz Kaske cautions: "We have had significant overall growth rates, but we have also been affected by the weakening of the global economy."

It's clear that this European recovery will be slower than previous ones. At best, it looks like 1.5% or so growth in the first year. One reason is that the competitive pressures of European integration will continue to force more company restructurings and job losses. As a result, unemployment is expected to rise to 9.3% this year. For example, Volkswagen is boasting it will make a record 3.6 million cars this year, up 10% from 1991. But it is still planning to slash its German payroll of 130,000 by 12,500 over the next four years.

Germany's Bundesbank also threatens to spoil the party with tough monetary policy. The bank is likely to stay its course after recent strikes resulted in pay hikes greater than the inflation rate. And, paradoxically, Europe's nascent upturn is giving the bank ammunition to keep money tight. "The question is why ease up at all on rates now that the worry about creating a recession is very small," says Richard Reid, head of research for Union Bank of Switzerland. in Frankfurt.

PLUMPER POUND. That kind of talk sends jitters through both Britain and France, where politicians are struggling to parlay the upturn into a genuine recovery. In mid-May, Britain's Conservatives piggybacked their election victory and a stronger pound into a 0.5% interest-rate cut, to 10%. The British are seeing suggestions of a pickup in auto sales and industrial production for the first time in two years.

In France, ruling Socialists are desperate to tame 9.9% unemployment and salvage their hopes in next year's elections. France recently moved to cut bank reserve requirements, permitting them to lower base lending rates and injecting some $6 billion into the economy. And as the Paris market roars ahead, the government is selling off a 9% stake in state oil producer Total to raise $1.85 billion to pay for new unemployment programs.

Europe's patchy recovery will no doubt force governments to find other creative ways to sustain growth. But they don't have much maneuvering room this time. In signing on to economic union, EC governments agreed to slash debt and deficits to create a stable, anti-inflation environment across the Continent. That task will be a lot easier if the early signs of recovery turn into a full-blown upswing.

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