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Cablegate: French Gdp Growth to Slow in the First Half

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A

1. SUMMARY. GDP growth is likely to slow in the first half
of 2005, mainly due to lower consumer spending. Rising oil
prices and the appreciation of the euro are curbing
investment and exports. Measures recently announced by the
government to boost consumption are unlikely to be
sufficient to help boost economic growth. END SUMMARY.

GDP Growth Likely to Slow in the First Half

2. The National Institute for Statistical and Economic
Studies (INSEE) revised upward its Q-1 GDP growth forecast
to 2.4% (annualized) from 2.0%, but revised significantly
downward Q-2 GDP growth to 1.2% from 1.6%. INSEE's Chief
forecaster Michel Devilliers said on March 24 "after a
strong rebound from mid-2003 to mid-2004, the economic
recovery has become less robust under the shocks of oil and
the U.S. Dollar drop." The economy is cooling after
expanding 2.3% in 2004, hindered by the highest jobless rate
in five years (10.1% in January and February).

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3. INSEE forecast consumer growth, which accounts for 54%
of GDP, to slow to 3.2% (annualized) in Q-1 and to 1.2% in Q-
2 from 3.6% in Q-4 2004, which had driven 2004 French GDP
growth above average euro zone economic growth rates,
notably the German. INSEE explained the slower consumer
spending in Q-2 is caused by a decrease in consumer
purchasing power due to low job creation, and by higher
social contributions to reduce the health insurance deficit.

4. According to INSEE, corporate investment will increase
4.9% (annualized) in Q-1, but slow to 3.2% in Q-2 despite
low interest rates. Rising oil and raw material prices are
curbing global economic growth and corporate profits.
Devilliers said that companies are not motivated to increase
significantly their investment in France, instead, they are
investing abroad to grow.

5. Based on European surveys, industrialists are not
optimistic about export outlook, notably due to the strength
of the euro. INSEE forecast export growth to slow to 4%
(annualized) in Q-1 and Q-2 from 5.3% in Q-4 2004.

The Economy Creates Very Few Jobs

6. Private and public sector economists agreed that economic
growth is creating very few jobs, and consumers' purchasing
power will remain moderate. INSEE forecast low job creation
of 41,000 jobs in the first half (including 27,000 in the
private sector), barely enough to absorb the increase in the
labor force. INSEE also forecast a decrease in the
unemployment rate to 9.9% by June, not sufficient to achieve
the Prime Minister's objective to trim unemployment by 10%,
or reduce the rate to less than 9% this year from 10% in
2004. Devilliers said that making 9% by the end of 2005 is
impossible, since employment increases about 1.6% per year
when GDP increases 2.0%.

Inflation Remains Remarkably Moderate

7. Although oil prices are reaching records (56.15 USD on
March 17), INSEE is confident that inflation will recede to
1.5% in June from 1.6% in February, assuming the cost of the
Brent crude oil averages 40 USD a barrel in Q-2.
Nevertheless, rising oil prices have a visible impact on
prices of manufactured products. Underlying inflation
(inflation excluding food, alcohol, tobacco and energy) is
increasing, to slightly above 1.5%.

Risks of the INSEE's Scenario are Mixed

8. INSEE did not rule out the upside risk of a rebound in
the U.S. economy that would be favorable to the euro zone
economy, and thus to the French. INSEE economists also keep
in mind that oil prices could stay at 50 USD a barrel in the
first half-year. At this level, oil prices would boost
inflation and cut GDP growth by 0.1% during the first half-

--------------------------------------------- --------
GOF Measures in Favor of Consumption will Not Do Much
--------------------------------------------- --------

9. INSEE did not include in its forecasts measures just
announced (on March 23) by Prime Minister Jean-Pierre
Raffarin, notably new tax breaks for companies paying profit-
sharing bonuses to employees, relaxing access to funds
locked in employees savings plans, and the GOF's promise to
raise civil servants' wages. Devilliers commented that tax
breaks and easier access to savings plans would have a
moderate effect on consumption. Only employees working in
large companies benefit from profit sharing and savings
plans, but not all potential beneficiaries take advantage of
the new measures, and in 2004, profit-sharing bonuses became
subject to income taxes. Devilliers made a comparison with
last year's measures in favor of consumption, saying that
only 20% of the tax-exempted gifts to family members
directly benefited consumption. The remainder benefited
real estate investment or was saved by recipients,
resulting, in this case, in a transfer of savings between

--------------------------------------------- -----------
GOF Lowers GDP Forecast, but Still Hopes to Achieve 2.5%
--------------------------------------------- -----------

10. On March 16, Finance Minister Breton cut the GOF 2005
GDP growth forecast to a 2.0-2.5% range from 2.5%, citing
the 61% increase in Brent crude oil, and the euro's 5.3%
gain against the US Dollar in the past 12 months.
Nonetheless, he said that the GOF still hoped for 2.5% GDP
growth in 2005.

11. Currently, the average 2005 GDP forecast of the
Consensus group of 17 banks and institutions, including BNP
Paribas and Morgan Stanley, is much lower at 1.9%.
Devilliers warned "meeting the lower end of Breton's GDP
growth forecast for this year, requires GDP to expand 2.1%
(annualized) in Q-3 and Q-4. Meeting the upper range
requires GDP growth of 4.8% in Q-3 and Q-4." He advised
"France needs to lift structural barriers to create jobs,
and boost innovation, and focus on the most promising export
markets to grow faster."


12. 2.0% GDP growth in 2005 is more likely than 2.5%, as
4.8% GDP growth in Q-3 and Q-4 looks unrealistic. In the
reform field, the law modifying and making the 35-hour
workweek more flexible has just been passed. However, the
law does not automatically increase the workweek. Companies
still have to negotiate longer hours with their employees on
a case-by-case basis, which is a practical obstacle to hoped-
for productivity gains.


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