US embassy cable - 05PARIS3581

UNCLAS SECTION 01 OF 02 PARIS 003581 
 
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 Q-1 GDP INCREASED MUCH LESS THAN EXPECTED 
 
REF:  Paris 3352 
 
1. SUMMARY.  Disappointing GDP growth in Q-1 (0.8% 
annualized) means that the GOF target of 2.0 to 2.5% GDP 
growth in 2005 is almost impossible to achieve.  Most 
economists revised their forecasts downward to levels close 
to 1.5%.  END SUMMARY. 
 
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GDP Increases 0.8% (annualized) in Q-1 
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2.  GDP growth (seasonally and workday adjusted) only 
increased 0.8% (annualized) in the first quarter of 2005, 
slowing down from 2.8% in 2004 Q-4 (revised downward from 
3.6%).  The slowdown was mainly due to lower household 
consumption growth (2.8% annualized versus 4.5% in Q-4).  Of 
note, health spending decreased, probably the first effects 
of the health insurance reform.  Inventories of finished 
goods also contributed to the slowdown, decreasing in Q-1 as 
companies preferred getting rid of unsold articles.  French 
performance on the trade front was not good as exports 
decreased in Q-1 (minus 0.4% annualized), resulting in a 
negative 0.2% contribution of foreign trade to GDP growth, 
the first negative contribution since 2000.  On a more 
positive note, corporate investment increased significantly 
for the second quarter in a row (6.6% annualized), albeit at 
a lower pace than in Q-4 (7.8%). With the release of Q-1 GDP 
growth, the French National Statistical Agency INSEE updated 
its methodology, using the year 2000 as the reference point 
for the national income accounts (more on this below). 
 
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Q-1 GDP Growth Figure is Disappointing 
-------------------------------------- 
 
3.  The Q-1 GDP growth is far short of the 2.0% (annualized) 
forecast of many private-sector economists, and even worse 
than the May 18 Bank of France's governor Christian Noyer's 
guess that economic growth could slow to 1.6% in Q-1.  CCF's 
economist Nicolas Claquin remarked that "the overall picture 
for the French economy is rather negative, but corporate 
investment growth is improving and household consumption is 
still OK."  Before the release of disappointing Q-1 GDP 
figure, economists forecast low GDP growth in Q-2, and 2005 
GDP growth unlikely to be more than 1.5-1.6% (ref).  After 
the release of Q-1 GDP data, some economists (notably Exane 
economist Emmanuel Ferry) are not totally ruling out a 
decrease in GDP in Q-2.  Goldman Sachs economist Nicolas 
Sobczak cut his 2005 GDP growth forecast to as low as 1.4% 
from 1.7%, saying "opponents to the constitution will be at 
ease to ask: what is the plan for economic growth?" 
 
4.  INSEE's Chief forecaster Michel Devilliers admitted that 
"2005 will not be a good year."  Q-2 growth is likely to be 
low since France, and the euro zone, are affected by three 
shocks (the euro strength against the US dollar, oil prices, 
and China's competition).  Nonetheless, Devilliers opined 
that "the French economy keeps its resilience, notably in 
consumption and corporate investment."  According to 
Devilliers, "fundamentally, the situation is healthy, with 
inflation under control and low interest rates." 
 
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2000 NIA Basis, a Progress for European Harmonization 
--------------------------------------------- -------- 
 
5.  Effective May 20, 2005, the National Agency for 
Statistical and Economic Studies began using a new national 
income account reference point, called "the 2000 basis". 
The switch from the former 1995 basis gave INSEE the 
opportunity to make three major improvements:  adapting GDP 
data to fit to a better description of the French economy, 
reevaluating data by using new information sources or 
information not always available on an annual basis, and 
using 2000 as a reference year for GDP data taking into 
account inflation - a change which is required by the 
European statistical agency Eurostat. 
 
6.  INSEE stressed that new conceptual and methodological 
changes were necessary to improve the quality of the French 
national income accounts and to make progress with European 
harmonization. 
 
7.  The switch to the 2000 basis triggered a retrospective 
revision in GDP data and related aggregates.  The 2004 GDP 
growth was revised downward to 2.3% from 2.4%.  GDP growth 
in the two previous years was revised upward to 1.2% from 
1.1% (2002), and to 0.8% from 0.5% (2003). 
 
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COMMENT 
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8.  The Q-1 performance is much lower than expected, 
reinforcing our guess that France growth is well below the 
GOF's GDP growth forecast of 2.0-2.5% (ref), and well below 
the pace needed to reduce the government budget deficit 
below 3.0% of GDP, or reduce the unemployment rate, 
currently at a five-year high of 10.2%. 
WOLFF#