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Cablegate: 2005 Not a Good Vintage for French Gdp Growth

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

260938Z Jul 05

UNCLAS SECTION 01 OF 02 PARIS 005141

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: 2005 NOT A GOOD VINTAGE FOR FRENCH GDP GROWTH

Ref: Paris 4565

1. SUMMARY. The National Statistical Agency's forecast
confirmed that the 2005 GDP growth is likely to be modest,
close to 1.5% -- lower than the 2% government forecast,
despite an expected recovery in the second half of the year.
The agency sees a high risk of sluggish economic growth
among France's European partners. The agency forecast that
the unemployment rate would decrease to 9.8% by the end of
the year (down from the 10.2% current level), as a result of
new government measures to promote employment. END SUMMARY.

-------------------------------------------
INSEE Forecast GDP to increase 1.5% in 2005
-------------------------------------------

2. In late June, the French National Statistical Agency
(INSEE) forecast a GDP increase of 1.5% in 2005, shaving
half a point from Finance Minister Thierry Breton's
projection (reftel). INSEE analysts stressed that rising
oil prices and lackluster demand from France's European
partners caused an economic slowdown in France in the first
half of 2005.

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3. GDP growth is forecast to accelerate to 1.6% (annualized)
in Q-3 and 2.4% in Q-4, representing an increase from 0.8%
in Q-1 and 1.2% in Q-2. A decrease in oil prices to USD 45
is expected to slow inflation (1.5% in December from 1.7% in
May), boosting households' purchasing power and consumer
spending (which accounts for more than half of GDP) in the
second half of the year.

4. INSEE forecasts a recovery in exports in the second
half, scaling back its euro exchange rate prediction to 1.25
USD from 1.30 USD in its previous forecast. Analysts expect
exports to euro zone partners to stagnate due to the fact
that euro zone economic growth has been slowed by
sluggishness in Italy and Germany. Euro zone economic
growth is not predicted to be more than 1.3% in 2005.
Despite the improvement in the second half, export growth
should slow from 2.4% to 1.9% in 2004.

--------------------------------------------- ----------
Labor Market Remains Weak; GOF Wants to Move Quickly on
Measures
--------------------------------------------- ----------

5. INSEE's Chief forecaster, Michel De Villiers, stated
that the French labor market remained weak in the first half
of 2005. Hiring is expected to slow this year due to
reduced job creation in the private sector (30,000 new jobs,
after last year's 40,000). Nonetheless, employment could
stage a rebound (adding as many as 130,000 new jobs) near
the end of 2005 due to government measures (reftel), which
could have the potential to reduce the unemployment rate to
9.8% from its 10.2% current level. Nevertheless, the French
unemployment rate remained stuck at 10.2% in May for the
third consecutive month.

6. The Government wants to move quickly on emergency
measures to encourage employment by requesting authorization
from the Parliament to use "ordonnance" procedures for two
months. Ordonnance procedures will allow the government to
amend labor laws without requiring controversial legislative
up or down votes. The National Assembly passed the bill
granting the GOF "ordonnance" powers for urgent employment
measures on July 5. However, senators passed amendments to
reinstate protections for employees laid off before the end
of their contracts. The bill will extend the probation
period from several months to two years - during which very
small businesses may fire workers without extended notice
and administrative proceedings. A joint commission composed
of deputies and senators reconciled the two versions of the
bill and it was formally adopted on July 13.

7. When asked about the difference between INSEE's and the
government's 2.0% forecast, De Villiers said: "It seems to
us that in the current circumstances, and in light of what
we expect in the second half, it's difficult to go beyond
1.5% (growth) in 2005." INSEE singled out sluggish economic
growth in continental European economies as the main
obstacle to French economic recovery. Nonetheless, INSEE
did not rule out the negative impact of an increase in oil
prices, saying that oil prices of USD 60 per barrel would
further cut 2005 GDP growth to about 1.3%.

8. De Villiers indicated that a cut in the European Central
Bank interest rate (below 2%) might provide a psychological
fillip since "companies in the region are tense, a gesture
would relax them," but such a move would not have a direct
and immediate positive impact on the French economy.

--------------------------------------------- -----------
Upward Revision to Q-1 GDP Growth Slightly Boosts Annual
Figure
--------------------------------------------- -----------
9. On June 30, after publishing its forecast, INSEE revised
upward Q-1 GDP growth from 0.8% to 1.3% (annualized). Based
on our calculations, this revision raises INSEE's 2005 GDP
growth forecast to 1.6% from 1.5%. Meeting the 2.0%
government target requires an average of 2.0% annualized
growth per quarter in the last three quarters.

--------------------------------
GOF Sees Better Outlook for 2006
--------------------------------

10. De Villiers stated that GDP growth might accelerate to
2% in 2006, but was less optimistic than Budget Minister
Jean-Francois Cope. In an interview with Radio J on July 3,
Cope predicted that the French economy would grow 2.25-2.75%
in 2006. However, he said "all this is a bit uncertain, it
is too early in 2005" and further warned that "the major
negative factor is the price of oil." He reiterated that
the government will be "in position" to keep its budget
deficit under 3% of GDP in 2005", despite weaker-than-
expected GDP growth (based on recent government downward
revision to 2%).

-------
COMMENT
-------

11. GDP growth of 1.5% in 2005 would make it even more
difficult to tackle the bloated budget deficit. INSEE's
forecast confirms that 2005 economic growth will only be
modest, taking into account the persistence of structural
problems. With the 2007 presidential elections in mind, the
Government has chosen to subsidize job creation, rather than
press for economic reforms to address structural causes of
unemployment.

STAPLETON

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