Cablegate: French Gdp Growth Around 2 Percent in 2006

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RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHFR #4417/01 1781044
ZNR UUUUU ZZH
R 271044Z JUN 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 9024
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 PARIS 004417

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PASS FEDERAL RESERVE
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STATE FOR EB and EUR/WE
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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 AROUND 2 PERCENT IN 2006

Ref: Paris 3464

1. SUMMARY. In its June overview of the French economy, the
National Statistics Agency estimated 2006 GDP will increase 2
percent in 2006, the low end of the original government forecast
range of 2.0-2.5 percent on which the 2006 budget was based. Any
improvement in GDP growth above 2.0 percent largely depends on world
economic growth, most notably stronger domestic demand in Germany,
France's main trading partner. END SUMMARY

Economic Growth in France and the Euro Zone
-------------------------------------------
2. In its June overview of the French economy, the National
Statistics Agency (INSEE) noted that the French economy has
experienced robust economic growth since summer 2005. The 2.0
percent growth in GDP (annualized) in Q-1 confirmed steady household
consumption and a recovery in exports, both of which benefited from
a dynamic world economy. Despite increases in oil price prices,
inflation remained moderate as price increases did not result in
significant wage increases.

3. INSEE expects ECB interest rates to rise above 2.75 percent,
which would increase long-term interest rates in the euro zone.
These potential increases may offset any positive impact of higher
domestic demand on economic growth. Demand in the euro zone has
risen considerably thanks notably to a recovery in domestic demand
in Germany. Taking into account the euro's gains against the US
Dollar, INSEE foresees the ECB implementing monetary policies meant
to bring economic growth in the euro zone back in line to around 2.1
percent, a pace closer to its long-term trend.

French GDP on a 2 percent Trend in 2006
---------------------------------------
4. In this context, the French economy would increase at a pace
close to 2.0 percent in the second half of this year, but would not
benefit from "any real acceleration." INSEE predicted GDP to
increase 2.0 percent (annualized) in 2006 after 1.2 percent in 2005.
GDP, which did increase 2.0 percent in Q-1 (ref), is forecast to
increase 2.4 percent in Q-2, and to keep growing at the same pace in
Q-3 and Q-4. Growth in the construction and services sectors should
offset modest 1 percent growth in the manufacturing sector which is
due largely to poor performance in the automobile sector.

5. Michel Devilliers, INSEE's chief analyst, emphasized that
household consumption seemed to be heading in the right direction.
Consumption of manufactured products did well in April and May, this
due in part to the soccer World Cup. INSEE predicted household
consumption to increase 2.6 percent thanks to a 2.4 percent increase
in purchasing power. That increase reflects moderate inflation (1.8
percent in December over December 2005) and a decrease in the
unemployment rate from 9.3 percent in April to 9.0 percent in
December, close to the government goal of 8.9 percent. INSEE
expects the labor situation to improve not only because of a
shrinking labor force and an increase in government-subsidized
employment contracts, but also due to job creation in the private
sector (20,000 jobs per quarter). INSEE estimated that a total of
196,000 jobs will be created in 2006, including 75,000 jobs in the
private sector. This figure is considerably higher than the 99,000
jobs created in 2005, with only 63,000 jobs in the private sector.

6. INSEE forecast a 7.4 percent rebound in exports and a 10.5
percent increase in exports of manufactured products, again due to
strong foreign demand, notably from Germany, France's main trading
partner. When asked whether it would be preferable to have France
or Germany win the World Cup, INSEE said it would prefer Germany
because of the positive impact a victory would have on consumer
confidence and domestic demand in the country, directly affecting
French exports. According to Devilliers, increased consumption in
France was related first to an increase in purchasing power and not
household confidence, which he deemed reassuring.

7. Even so, export growth would be insufficient to significantly
boost corporate investment. INSEE forecast corporate investment to
pick up in Q-2, increasing to 3.8 percent in 2006; this would mirror
2005 numbers but remain below levels normally seen in a period of
economic recovery. Corporate margins as a percent of value added
are likely to deteriorate as productivity gains would increase less
than labor costs.

Mixed Risks
-----------
8. INSEE's estimates are based on oil prices at 70USD per barrel
and a Euro/US Dollar exchange rate at 1.27. INSEE saw a possible

PARIS 00004417 002 OF 002

decrease in the US Dollar against the euro, which could occur should
U.S. budget and current account deficits sink further into the red,
as a major risk. Increases in the prices of raw materials could
also create fears about the resurgence of inflation. On a positive
note, INSEE did not exclude the possibility that a surge in the
world economy in the very short-term could give some dynamic
economic growth in the euro zone, including France.

Comment
-------
9. France does not seem to benefit fully from world economic
growth. INSEE's 2006 GDP growth forecast is at the low end of the
government's original estimates, ranging from 2.0-2.5 percent for
2006. This discrepancy may fuel questions about the accuracy of
government estimates, especially since Parliamentary deputies
started on June 22 to debate the broader aspects of the 2007
budget.

STAPELTON#

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