US embassy cable - 05PARIS5141

UNCLAS SECTION 01 OF 02 PARIS 005141 
 
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:  2005 NOT A GOOD VINTAGE FOR FRENCH GDP GROWTH 
 
Ref: Paris 4565 
 
1. SUMMARY.  The National Statistical Agency's forecast 
confirmed that the 2005 GDP growth is likely to be modest, 
close to 1.5% -- lower than the 2% government forecast, 
despite an expected recovery in the second half of the year. 
The agency sees a high risk of sluggish economic growth 
among France's European partners.  The agency forecast that 
the unemployment rate would decrease to 9.8% by the end of 
the year (down from the 10.2% current level), as a result of 
new government measures to promote employment.  END SUMMARY. 
 
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INSEE Forecast GDP to increase 1.5% in 2005 
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2.  In late June, the French National Statistical Agency 
(INSEE) forecast a GDP increase of 1.5% in 2005, shaving 
half a point from Finance Minister Thierry Breton's 
projection (reftel).  INSEE analysts stressed that rising 
oil prices and lackluster demand from France's European 
partners caused an economic slowdown in France in the first 
half of 2005. 
 
3. GDP growth is forecast to accelerate to 1.6% (annualized) 
in Q-3 and 2.4% in Q-4, representing an increase from 0.8% 
in Q-1 and 1.2% in Q-2.  A decrease in oil prices to USD 45 
is expected to slow inflation (1.5% in December from 1.7% in 
May), boosting households' purchasing power and consumer 
spending (which accounts for more than half of GDP) in the 
second half of the year. 
 
4.  INSEE forecasts a recovery in exports in the second 
half, scaling back its euro exchange rate prediction to 1.25 
USD from 1.30 USD in its previous forecast.  Analysts expect 
exports to euro zone partners to stagnate due to the fact 
that euro zone economic growth has been slowed by 
sluggishness in Italy and Germany.  Euro zone economic 
growth is not predicted to be more than 1.3% in 2005. 
Despite the improvement in the second half, export growth 
should slow from 2.4% to 1.9% in 2004. 
 
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Labor Market Remains Weak; GOF Wants to Move Quickly on 
Measures 
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5.  INSEE's Chief forecaster, Michel De Villiers, stated 
that the French labor market remained weak in the first half 
of 2005.  Hiring is expected to slow this year due to 
reduced job creation in the private sector (30,000 new jobs, 
after last year's 40,000).  Nonetheless, employment could 
stage a rebound (adding as many as 130,000 new jobs) near 
the end of 2005 due to government measures (reftel), which 
could have the potential to reduce the unemployment rate to 
9.8% from its 10.2% current level. Nevertheless, the French 
unemployment rate remained stuck at 10.2% in May for the 
third consecutive month. 
 
6.  The Government wants to move quickly on emergency 
measures to encourage employment by requesting authorization 
from the Parliament to use "ordonnance" procedures for two 
months.  Ordonnance procedures will allow the government to 
amend labor laws without requiring controversial legislative 
up or down votes.  The National Assembly passed the bill 
granting the GOF "ordonnance" powers for urgent employment 
measures on July 5.  However, senators passed amendments to 
reinstate protections for employees laid off before the end 
of their contracts.  The bill will extend the probation 
period from several months to two years - during which very 
small businesses may fire workers without extended notice 
and administrative proceedings.  A joint commission composed 
of deputies and senators reconciled the two versions of the 
bill and it was formally adopted on July 13. 
 
7.  When asked about the difference between INSEE's and the 
government's 2.0% forecast, De Villiers said: "It seems to 
us that in the current circumstances, and in light of what 
we expect in the second half, it's difficult to go beyond 
1.5% (growth) in 2005."  INSEE singled out sluggish economic 
growth in continental European economies as the main 
obstacle to French economic recovery.  Nonetheless, INSEE 
did not rule out the negative impact of an increase in oil 
prices, saying that oil prices of USD 60 per barrel would 
further cut 2005 GDP growth to about 1.3%. 
 
8.  De Villiers indicated that a cut in the European Central 
Bank interest rate (below 2%) might provide a psychological 
fillip since "companies in the region are tense, a gesture 
would relax them," but such a move would not have a direct 
and immediate positive impact on the French economy. 
 
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Upward Revision to Q-1 GDP Growth Slightly Boosts Annual 
Figure 
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9.  On June 30, after publishing its forecast, INSEE revised 
upward Q-1 GDP growth from 0.8% to 1.3% (annualized).  Based 
on our calculations, this revision raises INSEE's 2005 GDP 
growth forecast to 1.6% from 1.5%.  Meeting the 2.0% 
government target requires an average of 2.0% annualized 
growth per quarter in the last three quarters. 
 
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GOF Sees Better Outlook for 2006 
-------------------------------- 
 
10.  De Villiers stated that GDP growth might accelerate to 
2% in 2006, but was less optimistic than Budget Minister 
Jean-Francois Cope.  In an interview with Radio J on July 3, 
Cope predicted that the French economy would grow 2.25-2.75% 
in 2006.  However, he said "all this is a bit uncertain, it 
is too early in 2005" and further warned that "the major 
negative factor is the price of oil."  He reiterated that 
the government will be "in position" to keep its budget 
deficit under 3% of GDP in 2005", despite weaker-than- 
expected GDP growth (based on recent government downward 
revision to 2%). 
 
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COMMENT 
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11.  GDP growth of 1.5% in 2005 would make it even more 
difficult to tackle the bloated budget deficit.  INSEE's 
forecast confirms that 2005 economic growth will only be 
modest, taking into account the persistence of structural 
problems.  With the 2007 presidential elections in mind, the 
Government has chosen to subsidize job creation, rather than 
press for economic reforms to address structural causes of 
unemployment. 
 
STAPLETON