Cablegate: French Economic Growth 1.5% in 2005

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

171535Z Oct 05

UNCLAS SECTION 01 OF 02 PARIS 007102

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 ECONOMIC GROWTH 1.5% IN 2005

1. SUMMARY. The National Statistical Agency forecast 1.5%
GDP growth in 2005, the bottom end of the government's
official 1.5-2.0% prediction. The forecast takes into
account oil price increases and government programs for job
creation. Corporate growth is weak, but could edge up in
the second half. Export growth is likely to stay moderate,
remaining below import growth. The government scenario of
2.0-2.5% GDP growth in 2006, on which the 2006 budget is
based, is unlikely, absent an immediate acceleration in
economic growth. END SUMMARY.

No Acceleration in GDP Growth in 2005
--------------------------------------
2. The National Institute for Statistical and Economic
Studies (INSEE) did not revise its June Forecast, still
expecting GDP to increase by 1.5% in 2005, the bottom end of
the government 1.5-2.0% target. INSEE forecast GDP to
increase 1.6% (annualized) in Q-3 and to ease back to 1.2%
in Q-4 after increasing 1.6% in Q-1 (more than expected in
June) and edging 0.4% in Q-2. INSEE notably revised
downward its initial estimate of Q-4 GDP growth from 2.4%,
taking into account negative impacts of oil prices increases
on the French economy. INSEE's chief economist Michel
Devilliers stressed, "economic growth is yielding, but is
not breaking." Nonetheless, French economic growth in 2005
should be significantly lower than growth in the U.S.
(3.4%), but should surpass growth in the euro zone (1.3%).

3. Taking into account oil price increases INSEE revised
upward its 2005 inflation forecast to 2.1% from 1.5%. That
said, INSEE expected job creation to more than offset the
negative impact of oil prices on households' purchasing
power. Boosted by a 1.9% increase in purchasing power in
2005, household consumption, which rebounded in Q-3 based on
indicators, after decreasing 0.8% in Q-2, is expected to
increase at a more normal pace by the end of the year.

Unemployment Rate Decreases Slightly at the End of 2005
--------------------------------------------- ----------
4. INSEE forecast net job creation to increase 91,000 in
2005, permitting the unemployment rate to decrease to 9.7%
by the end of 2005. This is slightly better than the 9.8%
predicted in June, and down from 10.0%, the level recorded
at the beginning of 2005. The private sector could create
50,000 jobs in the construction and the services sector
compared with 5,000 in 2004, notably due to the New Recruit
Contract ("Contrat Nouvelles Embauches" CNE). Karine
Berger, head of the INSEE's Short-term Economic Analysis
Division, acknowledged that forecasting job creation related
to the CNE is difficult. She estimated that 10,000 to
20,000 CNEs might be created by the end of 2005. (The
100,000 CNEs announced in the press are only promises, not
signed contracts).

5. Job creation would also be significant in the public
sector thanks to government-subsidized contracts related to
the government's Social Cohesion Plan. For the first time
in three years, the public sector would create 61,000 jobs.

Trade a Major Drag on Growth but Investment May Rise
--------------------------------------------- -------

6. INSEE forecast imports - boosted largely by consumption
- to increase 5.2% in 2005, more than exports (2.2%). In
2005, foreign trade will have a negative 0.9% impact on GDP
growth. At the end of August, the foreign trade deficit
(fob/fob, s.a.) stood at 15.1 billion euros, exceeding the
entire trade deficit of 2004. Karine Berger stressed that
the strong euro, apparently anchored above USD 1.20,
hampered the competitiveness of French exports more severely
than expected. INSEE used a 1.23 USD-euro exchange rate in
its forecast, the euro average since August 1.

7. Berger also noted that the manufacturing sector has been
having difficulties, and continued to be affected by
sluggish domestic demand in the euro zone, France's major
trading partner. Nonetheless, INSEE forecast corporate
investment to increase 1.4% (annualized) in Q-3, and 1.6% in
Q-4, after decreasing 4.0% in Q-2.

Main Risk: Oil Prices
--------------------------------------
8. INSEE underlined that strong elasticity of oil prices
and changes in demand for oil could still affect its
forecast. The approach of winter is creating new
uncertainty about oil prices. On the other hand, recent
price increases could drive a decrease in the world demand
for oil, which could ultimately result in a long-term
decrease in oil prices.

9. INSEE economists opined that only a decrease in the euro
against the U.S. dollar or a recovery in domestic demand of
France's trading partners (Germany, Italy and the U.K.,
which recorded its lowest GDP growth in the last twelve
years) could give breath to French industry.

Difficult to Reach 2.0-2.5% GDP growth in 2006
--------------------------------------------- -----
10. Devilliers remarked that the Consensus growth forecast
of 1.8% GDP growth in 2006 requires 2.0% (annualized growth
per quarter). Reaching 2.25%, the middle of the 2.0-2.5%
Government forecast would be even more difficult, requiring
2.8% (annualized) growth per quarter. He stated "everything
is open in 2006", but remarked that "a quick acceleration is
not taking place now."

COMMENT
-------
11. Despite low interest rates, corporate investment growth
remained weak due to uncertainties caused by rising oil
prices. "Liberal" economists, including member of the
"Conseil d'Analyse Economique" Michel Didier said that the
situation was not so bad to necessitate vigorous budget
measures to boost domestic demand, but suggested the
government should concentrate its economic policy on
competitiveness and investment. INSEE's forecast confirms
that the government scenario of 2.0-2.5% GDP growth in 2006,
on which the 2006 budget is based, is unlikely, absent an
immediate acceleration in growth. Acceleration in growth
requires further structural reforms. However, even if any
were implemented (no major reforms are contemplated), they
would not have any immediate effect.
Stapelton

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