US embassy cable - 05PARIS3352

UNCLAS SECTION 01 OF 02 PARIS 003352 
 
SIPDIS 
 
SENSITIVE 
 
PASS FEDERAL RESERVE 
PASS CEA 
STATE FOR EB and EUR/WE AND DRL/IL ANC INR/EUC 
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, ELAB, PGOV, FR 
SUBJECT:  FRENCH 2005 GDP MAY BE LOWER THAN 2% 
 
 
SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION 
 
REF:  PARIS 2298 
 
1. (SBU) SUMMARY:  French GDP growth has been slowing in the 
first half of 2005 according to recent indicators and 
information provided by contacts.  GDP is likely to be 
closer to 1.5% than to the Government's forecast of 2.0- 
2.5%, a situation not favoring job creation.  More modest 
growth and higher unemployment would reduce the GOF's 
capacity to honor its commitment to lower the budget deficit 
to below 3% of GDP, and to make reforms to assure durable 
economic growth.  With rising unemployment one of the main 
complaints by opponents of a new European constitution, the 
government seems uncertain about what steps to take next. 
END SUMMARY. 
 
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Unemployment Rate Increases; Manufacturing Output Decreases 
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2.  (U) Seventeen days before the France's May 29 referendum 
on Europe's new constitution, recent economic indicators are 
not good news for the GOF.  In March, the labor situation 
deteriorated.  The unemployment rate increased to a five- 
year high of 10.2%, well above the EU average of 8.1%.  On 
May 12, the National Statistical agency released March 
industrial production figures, showing a 0.5% decrease 
compared with February, the second decrease in a row, and a 
0.9% decrease in the manufacturing sector.  Only energy 
output increased, up 1.3% due to cold weather.  Based on 
surveys of industrialists, business confidence is low. 
Surveys suggest that manufacturing output could deteriorate 
in Q-2.  Output decreased 0.8% in Q-1 compared with Q-4. 
 
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Economists Foresee a Downturn in Economic Growth 
--------------------------------------------- --- 
 
3.  (U) Private-sector economists have characterized the 
situation as a "downturn in economic growth", not just a 
bump in the road, blaming high oil prices and the strong 
euro for the slump.  The excess level of inventories is the 
main problem for the industrial sector, notably the 
automobiles sector.  Most economists revised downward their 
2005 GDP forecasts to 1.5%-1.6%.  An expert at Exane, the 
number one French broker, stressed "it will be difficult to 
get more than 1.6% this year." 
 
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Eurostat Estimate Seems to Assume Stronger Growth than 
Thought in the Euro Zone 
--------------------------------------------- ------------- 
 
4.  (U) French data were released just before the Q-1 GDP 
growth figure for the euro zone, which showed a 2.0% 
increase (annualized) according to the Eurostat's flash 
estimate.  French Q-1 GDP is still unknown at this stage, 
but a preliminary estimate will be released on May 20. 
Germany caused a surprise with a 4% GDP increase 
(annualized) in Q-1, while Italian GDP contracted by 2% 
(annualized). 
 
5.  (U) According to Morgan Stanley's economist, Eric 
Chaney, who updated his analysis after Eurostat released its 
flash estimate, French GDP growth stood close to 1.6% 
(annualized) in Q-1 after a strong performance in Q-4 (3.6% 
annualized).  He argued that France may have benefited from 
the German growth, if not from the Italian, and the French 
services sector may have been more resilient than the 
manufacturing sector.  European surveys suggested that the 
services sector was less exposed to the rise in oil prices, 
and competitiveness from the U.S dollar and China. 
 
--------------------------------------- 
GOF Sticks to its 2.0-2.5% GDP Forecast 
--------------------------------------- 
 
6.  (U) On May 9, Finance Minister Thierry Breton confirmed 
that "the price of oil definitely weighs down on the French 
economic growth."  Nonetheless, he did not modify the GOF's 
2005 GDP forecast of 2.0-2.5%. 
 
7.  (SBU) That said, we recently met with the Finance 
Minister's chief economist, who said that Q-2 growth might 
only be 0.8-1.2% (annualized), notably due to less solid 
household consumption growth, and lower corporate growth 
compared with Q-1.  Despite high profitability, companies 
are hesitating to invest due to the strength of the euro 
against the US dollar, which harms exports outside the euro 
zone.  Companies are also in a wait-and see attitude before 
the referendum, not sure of the outcome and of its 
consequences for GOF economic policy. 
 
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Comment 
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8.  (U) GDP growth is likely to be even lower than 2% in 
2005 (see comment in ref).  Modest growth means no 
improvement in the labor market, and further worries about 
outsourcing, enlargement of the European Union, immigration, 
and deregulation of European markets.  That situation makes 
foreign direct investment in France more vital to job 
creation (septel).  Lower growth also makes more difficult 
the GOF's commitment to reduce the general government budget 
deficit to below 3% of GDP in 2005.  For the moment, the GOF 
is being careful to take no action that might further 
exacerbate the protests and social unrest that have 
accompanied the campaign leading up to the referendum May 29 
on the proposed constitution for the EU.   The GOF has 
delayed action on a range of sensitive economic and 
privatization policies and issues.  It has postponed the 
preparation of the 2006 central government budget, and the 
privatization of gas utility GDF to June.  The National 
Assembly will also stop examining bills in the last two 
weeks of May because of the election campaign for the 
referendum. 
WOLFF