US embassy cable - 05PARIS1050

UNCLAS SECTION 01 OF 02 PARIS 001050 
 
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, PBIO 
SUBJECT:  GDP INCREASED 2.3 PERCENT IN 2004; UNEMPLOYMENT 
REMAINED HIGH 
 
 
1.  SUMMARY.  According to the latest flash estimate, French 
GDP increased a relatively high 2.8 percent (annualized)  in 
the  fourth  quarter of 2004, which means  France  posted  a 
decent  2.3  percent growth rate for 2004.  Domestic  demand 
revived, contributing to significant import growth.   France 
posted  a  small foreign trade deficit as exports  increased 
less  than  imports.  Despite 2.3 percent  GDP  growth,  the 
unemployment rate remained stubbornly stuck at 9.9  percent. 
In  response,  the GOF announced measures to boost  economic 
growth and reduce significantly unemployment in 2005, to  be 
reported septel. END SUMMARY. 
 
--------------------------------- 
GDP increased 2.3 percent in 2004 
--------------------------------- 
 
2.  Based on a National Institute for Statistical and 
Economic Studies (INSEE) flash estimate, economic growth 
recovered in Q-4 as GDP increased 2.8 percent (annualized), 
after stagnating in Q-3.  Including an upward revision in 
both Q-1 and Q-2 GDP to 2.8 percent from 2.4 percent, full- 
year growth came in 2.3 percent, despite the Q-3 break, or 
2.5 percent non-adjusted for worked days.  The 2004 
performance, which is far better the 0.5 percent growth in 
2003, came in above the expected 2.2 percent growth, but 
remained below the 2.5 percent GOF forecast.  Finance 
Minister Gaymard rounded 2004 GDP growth to "about 2.4 
percent" in his February 8 speech on the GOF economic policy 
in the next 30 months. 
 
----------------------------------- 
Domestic demand was the Main driver 
----------------------------------- 
 
3.  Gaymard credited the strength in growth rates to a Q-4 
boom in consumer spending.  The Finance Minister said that 
consumer spending growth accelerated to 2.2 percent from 1.6 
percent in 2003 despite the correction that stalled the 
economy in Q-3.  Price discounts and various temporary tax 
breaks (cutting inheritance and gift taxes, and permitting 
early withdrawal from corporate savings accounts) helped 
boost spending in Q-4.  More than 2 million people withdrew 
5.6 billion euros from employee-savings.  The inheritance 
incentive resulted in the transfer of 5.4 billion euros 
between June and December.  Housing investment accelerated 
in France, increasing 3.7 percent. 
 
4.  The long-awaited recovery in corporate investment 
finally took place in 2004.  Corporate investment rebounded 
2.9 percent (excluding inflation), after decreasing 1.6 
percent in 2003. 
 
--------------------------------------------- ----- 
Exports Rebounded, but Increased Less than Imports 
--------------------------------------------- ----- 
 
5.  The French trade balance (Fob/Fob - Customs basis) 
registered a 7.8 billion euro deficit (0.4 percent of GDP) 
in 2004 compared with a 1.7 billion euro surplus in 2003. 
Exports increased (5.6 percent) less than imports (8.6 
percent).  Companies argued the strength of the euro made 
export business difficult.  The sharp increase in imports 
was mainly due to a rise in domestic demand and imported 
commodity prices, notably oil prices. 
 
6.  Gaymard confirmed that the rise in imports reflected 
strong domestic demand.  Foreign Trade Minister Francois 
Loos underlined that "both exports and imports reached 
record highs, the result of strong internationalization of 
the French economy."  Answering implicitly commentators who 
said that French exports lost competitiveness since world 
trade increased 12 percent in 2004, Loos stressed "there was 
no competitiveness problem since the French foreign trade 
excluding the energy deficit (28.9 billion euros) posted a 
surplus." 
 
7.  On a geographical (CIF/FOB) basis, France posted a 
deficit with the euro zone (6.6 billion euros) in 2004, 
notably a significant trade deficit with Germany, its major 
trading partner (11.5 billion euros).  France had a surplus 
with the 15 EU members (1.6 billion euros), and the 25 EU 
members (3.2 billion euros).  With the U.S., France posted a 
1.1 billion euro surplus. 
 
------------------------------------------ 
Despite Oil Prices, Inflation was Moderate 
------------------------------------------ 
 
7.  In December, the year-over-year consumer price increase 
was moderate (2.1 percent), notably because oil prices 
dropped to USD 43.45 a barrel at year's end from a record 
high of USD 55.17 on October 22.  The increase in consumer 
prices excluding oil prices was 1.5 percent, probably 
reflecting the on-going impact of the Government "arm- 
twisting" on distributors to cut retail prices.  Price 
increases in the services sector were less moderate (2.6 
percent). 
 
--------------------------------------------- ---------- 
Weakness:  Unemployment Rate Stuck at Around 10 percent 
--------------------------------------------- ---------- 
 
8.  The unemployment rate remained high at 9.9 percent in 
December, twice the unemployment in some other European 
countries as the French economy only created 40,000 jobs in 
2004.  The GOF pledges to steer joblessness below 9 percent 
in 2005 by reducing the number of unemployed by 10 percent 
through the net creation of 200,000 to 300,000 jobs. 
 
--------------------------------------------- ----- 
GDP Growth Could Be Lower than 2.5 percent in 2005 
--------------------------------------------- ----- 
 
9.  Q-4 GDP growth was better-than-expected.  Many private- 
sector economists had forecast 2.4 percent (annualized).  In 
January, economists forecast 2005 GDP growth to slow to 1.8 
percent, below a potential trend of 2.25 percent, notably 
fearing a renewed weakness in consumption in early 2005 due 
to high unemployment that contributes to household pessimism 
and amplifies the vicious circle of lower demand and fewer 
job creation.  Recently, the Bank of France forecast GDP to 
increase 2.0 percent (annualized) in Q-1 2005, taking into 
account recent INSEE's estimate of Q-4 GDP growth, and 
indications provided by its business climate indices for 
January. 
 
--------------------------------------------- -------------- 
Comments:  Achieving 2.5 percent GDP Growth in 2005 Remains 
Unsure 
--------------------------------------------- -------------- 
 
10.  France's 2004 GDP performance was no so bad, as GDP 
growth outpaced other large euro zone countries, notably 
Germany.  That said, the GOF is aware that achieving its 2.5 
percent GDP growth objective in 2005 and reducing 
significantly unemployment will be hard to achieve without 
further measures and reforms.  In his February 8 speech, 
Gaymard announced a series of measures to boost economic 
growth and eliminate the vicious lack-of-confidence circle 
by stimulating consumer spending, the purchasing power and 
activity of companies, and thus job creation.  The GOF 
policy will be reported septel. 
LEACH