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Cablegate: French Gdp Growth Surged in Q-2

VZCZCXRO1384
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHFR #5495 2280523
ZNR UUUUU ZZH
R 160523Z AUG 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 0387
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS PARIS 005495

SIPDIS

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 GDP GROWTH SURGED IN Q-2

REF: PARIS 4417

1. SUMMARY. GDP increased 4.5-4.9 percent in Q-2, mostly due to
strong growth in domestic consumption and exports. The GOF
indicated that GDP growth was running at a 3 percent pace at the end
of the first semester, but officials are unlikely to revise upwards
their 2006 GDP growth forecast beyond the current 2.0-2.5 percent.
2007 GDP growth forecasts are expected to stay in the range of
2.0-2.5 percent due fears of high oil prices, a strong euro, and a
U.S. economic slowdown. End summary.

GDP Increased 4.5-4.9 Percent in Q-2
------------------------------------
2. Based on the National Statistical Agency's (INSEE) flash
estimate, GDP (seasonally adjusted and workday related) increased
4.5-4.9 percent annualized in Q-2 compared with 2.0 percent in Q-1,
the fastest pace since the fourth quarter of 2000.

3. Household consumption continued to stoke the economy in Q-2
(reftel). Corporate growth may have contributed to Q-2 growth as
the production of capital goods recovered, but strong foreign demand
provided significant support as well. Exports peaked at a high of
194.4 billion euros in the first semester. In an interview appearing
in the newspaper France Soir, Foreign Trade Minister Christine
Lagarde commented on France's "excellent export figures,"
specifically citing the U.S. as France's number one trading partner
outside of Europe. A detailed report on Q-2 GDP growth will be
published by INSEE on August 22.

Government Trumpets Good News. . .
----------------------------------
5. Finance Minister Thierry Breton proclaimed INSEE's Q-2 GDP
growth data was "exceptional," and pointed out that it was much
better than the forecasts of 2.4 and 2.8 percent originally
predicted by the Bank of France and private economists,
respectively. Breton confirmed that GDP growth was running at a 3.0
percent annualized growth rate as of the end of the first semester
of 2006.

6. Breton also said that other economic indicators, including
business and household confidence, showed the French economy is
doing much better. The unemployment rate decreased to 9.0 percent
in June - much earlier than expected. Despite oil price increases,
inflation remained moderate. Consumer prices actually decreased 0.2
percent in July compared to June, but were up 1.9 percent compared
with July 2005.

. . . But Remains Cautious
--------------------------
6. Breton is confident that 2006 GDP growth will be higher than the
official 2.0-2.5 percent estimate, but did not announce an upward
revision as "life has taught us to be cautious." In preparing the
2007 economic forecasts, Finance Ministry specialists are
considering higher oil prices (USD 75-100 per barrel versus USD 63
in 2006), a euro close to 1.30 USD, and lower economic growth in the
U.S., which could ultimately have a significant impact on European
economies. They are also taking into account the implementation of
VAT increases in Germany in 2007, which could also harm the French
foreign trade (reftel).

Comment
-------

7. The growth registered in Q-2 means the government will meet its
2006 GDP growth forecast. However, consumption is likely to slow in
the second semester, since the effect of the Soccer World Cup will
be long over by then. The recovery of consumer spending in Germany
and Italy, France's main trading partners, remains fragile and
raises doubts about the continued growth of French exports. Rising
interest rates, higher oil prices and the crisis in the Middle East
do not bode well for the French economy.
The government is likely to stick to the same "cautious" GDP growth
estimates of 2.0-2.5 percent in 2007, a range Breton hinted at
earlier this year.

HOFMANN#

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