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Cablegate: French Gdp Growth Sluggish at Two Percent in 2006

VZCZCXRO6574
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #0704/01 0541829
ZNR UUUUU ZZH
R 231829Z FEB 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 5132
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 PARIS 000704

SIPDIS

SENSITIVE
SIPDIS

PASS FEDERAL RESERVE
PASS CEA
STATE FOR EB and EUR/WE
TREASURY FOR DO/IM
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
USDOC FOR 4212/MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: EFIN ECON PGOV FR
SUBJECT: FRENCH GDP GROWTH SLUGGISH AT TWO PERCENT IN 2006

REF: (A) Paris 653 (B) 06 Paris 7815

SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET

1. (SBU) SUMMARY: French GDP increased two percent in 2006. Export
growth recovered in Q-4, but GDP growth was still heavily dependent
on consumption. Job creation was lower than expected, although the
unemployment rate (ILO definition) fell to 8.6 percent. Sluggish
growth could further complicate the political environment for
economic reform and dampen the prospects for a more dynamic French
economy going forward. END SUMMARY

2. (U) INSEE, the French National Statistical Agency, confirmed that
French GDP increased 2.4 percent (annualized) in Q-4, well above the
zero growth in Q-3, as rebounding exports helped offset lower
consumer spending growth. The foreign trade contribution to GDP
turned positive in Q-4 after being negative in Q3. Corporate
investment increased 4.4 percent (annualized). Eric Dubois, INSEE
chief economist, stressed that GDP growth had recovered in Q-4, but
acknowledged that the rebound was "smaller than the 3.6 percent
initially expected."

3. (U) For 2006 as a whole, GDP increased 2.0 percent, rebounding
from 1.2 percent in 2005. GDP growth was mainly led by a 2.7
percent increase in household consumption, the best performance
since 2000. Corporate investment growth (3.8 percent) remained
unchanged compared with 2005. Despite a 3.0 percent increase to 6.2
percent, export growth remained lower than import growth (7.1
percent). INSEE's Dubois found "very disappointing" the 1.4 percent
increase in manufacturing production in 2006. That poor performance
was mainly due to an 8.6 percent decline in the automobile industry.


5. (U) The 2006 GDP growth rate is at the bottom end of the 2.0-2.5
percent range forecast by the government. Finance Minister Thierry
Breton admitted that GDP growth in 2006 was "not satisfactory." In
an interview with French TV channel Canal Plus, Breton argued that
"even if we had managed to achieve 2.5% growth, I would not have
been satisfied. My ambition is 3.5%-4%" GDP growth." For the
first year since 1994, German growth outstripped that of France, and
for the second consecutive year, France's economic growth has been
lower than the average for the eurozone.

6. (U) Many critics blame the sluggish GDP growth rate on a lack of
export-orientation in the French economy. That said, private-sector
economists noted several positive aspects in the French economic
outlook. Corporate investment growth and export growth were higher
in Q-4 compared with Q-3. Inventories decreased in Q-3 and Q-4, a
positive signal for potential economic growth. The real estate
sector slowed its rate of growth in 2006 with household investment
up 2.5 percent, compared with 4.1 percent in 2005, a relatively
smooth adjustment.

7. (U) Job creation in 2006 was well below Finance Minister Breton's
objective of creating 250,000 jobs (of which 80 percent were to have
been in the private sector). The French economy created a net of
only 142,000 jobs in the private non-farm sector. The services and
construction sectors respectively created 151,800 jobs and 60,700
jobs, while the industrial sector shed 70,700 jobs. The
unemployment rate (based on the ILO definition) decreased to 8.6
percent in December 2006 from 9.6 percent in December 2005,
partially due to demographic factors. However, the methodology of
the official unemployment rate may very well mask "hidden"
unemployment, and certainly obscures significantly higher
unemployment rates in some marginalized localities (ref A).

Comment
-------
8. (SBU) Economic growth in 2006 remained sluggish, and the
probability is that it will remain much the same this year (ref B).
French economic growth is overly dependent on domestic demand, which
presents a significant risk and a lost opportunity. Should domestic
consumption fall, French economic growth would stagnate. The lost
opportunity is a continuing failure to put in place policies -
including more flexible labor markets -- that would help the French
economy to capitalize on global trade and investment trends.
Healthy domestic demand means that France should weather most
near-term external trade disturbances, including a rise in the euro
exchange rate against other major currencies, such as the dollar and
yen. However, it also means that the next government, no matter its
market orientation, may be tempted to muddle through, to France's
long-term detriment, if the political price of reform looks too
high.

PARIS 00000704 002 OF 002

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