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Cablegate: French Gdp Growth Remains Moderate

VZCZCXRO8470
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #2791/01 1791435
ZNR UUUUU ZZH
R 281435Z JUN 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 8575
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 PARIS 002791

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 REMAINS MODERATE

REF: (A) Paris 2741

1. SUMMARY: In its June overview, the National Statistical Agency
INSEE forecast French GDP growth to increase 2.1 percent in 2007
compared to 2.2 percent in 2006. It stressed that GDP growth would
reach 2.5 percent in Q-4 over Q-4 2006 due to solid household
consumption. INSEE confirmed that the tax package proposed by the
President would have moderate impact on 2007 GDP growth. END
SUMMARY

GDP Forecast to Increase 2.1 Percent
------------------------------------
2. INSEE, the French national statistical agency, forecast GDP
growth in France will accelerate from a disappointing 2.0 percent
(annualized; preceding year price basis) in Q-1 to 2.4 percent in
Q-2 and 2.8 percent in each of Q-3 and Q-4, for an average of 2.1
percent in 2007, a slight dip from 2.2 percent in 2006. GDP growth
would accelerate in the second half mainly due to solid household
consumption, and run on a 2.5 percent pace in the fourth quarter
compared to Q-4 2006.

Consumption Boosted by Household Purchasing Power
--------------------------------------------- ----
3. A mild winter reduced household energy consumption energy in
Q-1, while purchases of clothing decreased. The drag on GDP growth
is estimated at 0.4 percent (annualized). INSEE forecast a catch up
in Q-2, although consumption of manufactured products (a partial
indicator of household consumption) decreased 0.8 percent in May
after dipping 0.1 percent in April. INSEE predicts that household
consumption should rebound in the second half of 2007, boosted by
increased household purchasing power (3.2 percent compared with 2.4
percent in 2006). Improvement would be due to lower inflation
(average of 1.2 percent compared with 1.6 percent in 2006, but at
the end of the year, inflation would increase to 1.5 percent based
on oil prices at 65 USD per barrel and an exchange rate of 1.35 USD
per euro). Household consumption would be boosted by dynamic
employment (300,000 jobs created compared to 256,000 in 2006) and a
reduced tax burden (reftel). INSEE forecast the impact of the tax
package on economic growth to be modest in 2007 since one of the
major measures, the tax exemption on overtime work, would become
effective only in October. INSEE says the impact of other measures
which are already effective (tax cuts on mortgage interest payments)
or which will become effective just after the law is passed during
the summer (tax cuts on inheritances) will be modest. Consumption
also reacts with a delay to tax cuts.

4. INSEE indicates that the unemployment rate should decrease by
the end of the year, but does not propose any forecast, saying that
in November it will participate in a meeting on employment data with
the National Council of Statistical Information (CNIS).
Unemployment data have been at the center of debates in the last few
months. INSEE says that the unemployment rate is currently close to
9.4 percent (versus GOF current estimate of 8.3 percent), but warns
its latest estimate should not be considered official.

Investment and Export Growth Not Sufficient
-------------------------------------------
5. INSEE forecast corporate investment continuing to rise
moderately in 2007, up 5.4 percent compared to 4.6 percent in 2006.
INSEE analysts said that export growth should slow at 3.1 percent
compared to 6.0 percent in 2006, partially due to the impact of a
strong euro. The forecast results in a positive 2.5 percent
contribution of household consumption to GDP growth, while foreign
trade would have a negative 0.3 percent contribution.

French GDP Growth Lags Behind Euro Zone
---------------------------------------
6. INSEE chief economist Eric Dubois commented "there will be no
major change in the pace of French economic growth in 2007." The
INSEE GDP forecast is marginally lower than the 2.2 percent OECD's
estimate, below the 2.25-2.5 percent government forecast, and
compares unfavorably with the 2.4 percent European Commission
forecast. Forecasts show the French GDP growth lagging behind the
2.8 percent euro zone GDP growth in 2007.

Main Risks
----------
7. The risk of a decline in real estate sector prices looks
limited. However, INSEE does not rule out an increase in oil prices
above 65 USD per barrel due to geopolitical factors and higher
consumption. No details were provided on possible impacts on GDP
growth.

COMMENT

PARIS 00002791 002 OF 002


-------
8. INSEE highlights the fact that its estimate is now based on
preceding year prices, saying the new basis permits direct
international comparisons and improves estimates of GDP components.
It is no surprise that household consumption forecasts, based on the
preceding year price, shows a 2.3 percent increase in 2007 (versus
2.8 percent in the 2000 price basis), household purchasing power is
up 2.4 percent (versus 2.9 percent), and consumption of manufactured
products growth looks much less solid (2.7 percent versus 4.3
percent). However, data regarding changes in inventories are no
longer available; only contribution of inventories to GDP growth is
available. Imports of goods and services do not add up. Ratios as
a percent of GDP (e.g. investment as a percentage of GDP) are still
based on estimates in current prices.

STAPLETON#

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