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Cablegate: French 2005 Gdp May Be Lower Than 2%

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

170924Z May 05

UNCLAS SECTION 01 OF 02 PARIS 003352

SIPDIS

SENSITIVE

PASS FEDERAL RESERVE
PASS CEA
STATE FOR EB and EUR/WE AND DRL/IL ANC INR/EUC
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 ELAB PGOV FR
SUBJECT: FRENCH 2005 GDP MAY BE LOWER THAN 2%


SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION

REF: PARIS 2298

1. (SBU) SUMMARY: French GDP growth has been slowing in the
first half of 2005 according to recent indicators and
information provided by contacts. GDP is likely to be
closer to 1.5% than to the Government's forecast of 2.0-
2.5%, a situation not favoring job creation. More modest
growth and higher unemployment would reduce the GOF's
capacity to honor its commitment to lower the budget deficit
to below 3% of GDP, and to make reforms to assure durable
economic growth. With rising unemployment one of the main
complaints by opponents of a new European constitution, the
government seems uncertain about what steps to take next.
END SUMMARY.

--------------------------------------------- --------------
Unemployment Rate Increases; Manufacturing Output Decreases
--------------------------------------------- --------------

2. (U) Seventeen days before the France's May 29 referendum
on Europe's new constitution, recent economic indicators are
not good news for the GOF. In March, the labor situation
deteriorated. The unemployment rate increased to a five-
year high of 10.2%, well above the EU average of 8.1%. On
May 12, the National Statistical agency released March
industrial production figures, showing a 0.5% decrease
compared with February, the second decrease in a row, and a
0.9% decrease in the manufacturing sector. Only energy
output increased, up 1.3% due to cold weather. Based on
surveys of industrialists, business confidence is low.
Surveys suggest that manufacturing output could deteriorate
in Q-2. Output decreased 0.8% in Q-1 compared with Q-4.

--------------------------------------------- ---
Economists Foresee a Downturn in Economic Growth
--------------------------------------------- ---

3. (U) Private-sector economists have characterized the
situation as a "downturn in economic growth", not just a
bump in the road, blaming high oil prices and the strong
euro for the slump. The excess level of inventories is the
main problem for the industrial sector, notably the
automobiles sector. Most economists revised downward their
2005 GDP forecasts to 1.5%-1.6%. An expert at Exane, the
number one French broker, stressed "it will be difficult to
get more than 1.6% this year."

--------------------------------------------- -------------
Eurostat Estimate Seems to Assume Stronger Growth than
Thought in the Euro Zone
--------------------------------------------- -------------

4. (U) French data were released just before the Q-1 GDP
growth figure for the euro zone, which showed a 2.0%
increase (annualized) according to the Eurostat's flash
estimate. French Q-1 GDP is still unknown at this stage,
but a preliminary estimate will be released on May 20.
Germany caused a surprise with a 4% GDP increase
(annualized) in Q-1, while Italian GDP contracted by 2%
(annualized).

5. (U) According to Morgan Stanley's economist, Eric
Chaney, who updated his analysis after Eurostat released its
flash estimate, French GDP growth stood close to 1.6%
(annualized) in Q-1 after a strong performance in Q-4 (3.6%
annualized). He argued that France may have benefited from
the German growth, if not from the Italian, and the French
services sector may have been more resilient than the
manufacturing sector. European surveys suggested that the
services sector was less exposed to the rise in oil prices,
and competitiveness from the U.S dollar and China.

---------------------------------------
GOF Sticks to its 2.0-2.5% GDP Forecast
---------------------------------------

6. (U) On May 9, Finance Minister Thierry Breton confirmed
that "the price of oil definitely weighs down on the French
economic growth." Nonetheless, he did not modify the GOF's
2005 GDP forecast of 2.0-2.5%.

7. (SBU) That said, we recently met with the Finance
Minister's chief economist, who said that Q-2 growth might
only be 0.8-1.2% (annualized), notably due to less solid
household consumption growth, and lower corporate growth
compared with Q-1. Despite high profitability, companies
are hesitating to invest due to the strength of the euro
against the US dollar, which harms exports outside the euro
zone. Companies are also in a wait-and see attitude before
the referendum, not sure of the outcome and of its
consequences for GOF economic policy.

-------
Comment
-------

8. (U) GDP growth is likely to be even lower than 2% in
2005 (see comment in ref). Modest growth means no
improvement in the labor market, and further worries about
outsourcing, enlargement of the European Union, immigration,
and deregulation of European markets. That situation makes
foreign direct investment in France more vital to job
creation (septel). Lower growth also makes more difficult
the GOF's commitment to reduce the general government budget
deficit to below 3% of GDP in 2005. For the moment, the GOF
is being careful to take no action that might further
exacerbate the protests and social unrest that have
accompanied the campaign leading up to the referendum May 29
on the proposed constitution for the EU. The GOF has
delayed action on a range of sensitive economic and
privatization policies and issues. It has postponed the
preparation of the 2006 central government budget, and the
privatization of gas utility GDF to June. The National
Assembly will also stop examining bills in the last two
weeks of May because of the election campaign for the
referendum.
WOLFF

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