US embassy cable - 05PARIS7102

UNCLAS SECTION 01 OF 02 PARIS 007102 
 
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 ECONOMIC GROWTH 1.5% IN 2005 
 
 
1. SUMMARY.  The National Statistical Agency forecast 1.5% 
GDP growth in 2005, the bottom end of the government's 
official 1.5-2.0% prediction.  The forecast takes into 
account oil price increases and government programs for job 
creation.  Corporate growth is weak, but could edge up in 
the second half. Export growth is likely to stay moderate, 
remaining below import growth.  The government scenario of 
2.0-2.5% GDP growth in 2006, on which the 2006 budget is 
based, is unlikely, absent an immediate acceleration in 
economic growth.  END SUMMARY. 
 
No Acceleration in GDP Growth in 2005 
-------------------------------------- 
2.  The National Institute for Statistical and Economic 
Studies (INSEE) did not revise its June Forecast, still 
expecting GDP to increase by 1.5% in 2005, the bottom end of 
the government 1.5-2.0% target. INSEE forecast GDP to 
increase 1.6% (annualized) in Q-3 and to ease back to 1.2% 
in Q-4 after increasing 1.6% in Q-1 (more than expected in 
June) and edging 0.4% in Q-2.  INSEE notably revised 
downward its initial estimate of Q-4 GDP growth from 2.4%, 
taking into account negative impacts of oil prices increases 
on the French economy.  INSEE's chief economist Michel 
Devilliers stressed, "economic growth is yielding, but is 
not breaking."  Nonetheless, French economic growth in 2005 
should be significantly lower than growth in the U.S. 
(3.4%), but should surpass growth in the euro zone (1.3%). 
 
3.  Taking into account oil price increases INSEE revised 
upward its 2005 inflation forecast to 2.1% from 1.5%.  That 
said, INSEE expected job creation to more than offset the 
negative impact of oil prices on households' purchasing 
power.  Boosted by a 1.9% increase in purchasing power in 
2005, household consumption, which rebounded in Q-3 based on 
indicators, after decreasing 0.8% in Q-2, is expected to 
increase at a more normal pace by the end of the year. 
 
Unemployment Rate Decreases Slightly at the End of 2005 
--------------------------------------------- ---------- 
4.  INSEE forecast net job creation to increase 91,000 in 
2005, permitting the unemployment rate to decrease to 9.7% 
by the end of 2005.  This is slightly better than the 9.8% 
predicted in June, and down from 10.0%, the level recorded 
at the beginning of 2005.  The private sector could create 
50,000 jobs in the construction and the services sector 
compared with 5,000 in 2004, notably due to the New Recruit 
Contract ("Contrat Nouvelles Embauches" CNE).  Karine 
Berger, head of the INSEE's Short-term Economic Analysis 
Division, acknowledged that forecasting job creation related 
to the CNE is difficult.  She estimated that 10,000 to 
20,000 CNEs might be created by the end of 2005. (The 
100,000 CNEs announced in the press are only promises, not 
signed contracts). 
 
5.  Job creation would also be significant in the public 
sector thanks to government-subsidized contracts related to 
the government's Social Cohesion Plan.  For the first time 
in three years, the public sector would create 61,000 jobs. 
 
Trade a Major Drag on Growth but Investment May Rise 
--------------------------------------------- ------- 
 
6.  INSEE forecast imports - boosted largely by consumption 
- to increase 5.2% in 2005, more than exports (2.2%).  In 
2005, foreign trade will have a negative 0.9% impact on GDP 
growth.  At the end of August, the foreign trade deficit 
(fob/fob, s.a.) stood at 15.1 billion euros, exceeding the 
entire trade deficit of 2004.  Karine Berger stressed that 
the strong euro, apparently anchored above USD 1.20, 
hampered the competitiveness of French exports more severely 
than expected.  INSEE used a 1.23 USD-euro exchange rate in 
its forecast, the euro average since August 1. 
 
7.  Berger also noted that the manufacturing sector has been 
having difficulties, and continued to be affected by 
sluggish domestic demand in the euro zone, France's major 
trading partner.  Nonetheless, INSEE forecast corporate 
investment to increase 1.4% (annualized) in Q-3, and 1.6% in 
Q-4, after decreasing 4.0% in Q-2. 
 
Main Risk:  Oil Prices 
-------------------------------------- 
8.  INSEE underlined that strong elasticity of oil prices 
and changes in demand for oil could still affect its 
forecast.  The approach of winter is creating new 
uncertainty about oil prices.  On the other hand, recent 
price increases could drive a decrease in the world demand 
for oil, which could ultimately result in a long-term 
decrease in oil prices. 
 
9.  INSEE economists opined that only a decrease in the euro 
against the U.S. dollar or a recovery in domestic demand of 
France's trading partners (Germany, Italy and the U.K., 
which recorded its lowest GDP growth in the last twelve 
years) could give breath to French industry. 
 
Difficult to Reach 2.0-2.5% GDP growth in 2006 
--------------------------------------------- ----- 
10.  Devilliers remarked that the Consensus growth forecast 
of 1.8% GDP growth in 2006 requires 2.0% (annualized growth 
per quarter).  Reaching 2.25%, the middle of the 2.0-2.5% 
Government forecast would be even more difficult, requiring 
2.8% (annualized) growth per quarter.  He stated "everything 
is open in 2006", but remarked that "a quick acceleration is 
not taking place now." 
 
COMMENT 
------- 
11.  Despite low interest rates, corporate investment growth 
remained weak due to uncertainties caused by rising oil 
prices.  "Liberal" economists, including member of the 
"Conseil d'Analyse Economique" Michel Didier said that the 
situation was not so bad to necessitate vigorous budget 
measures to boost domestic demand, but suggested the 
government should concentrate its economic policy on 
competitiveness and investment.  INSEE's forecast confirms 
that the government scenario of 2.0-2.5% GDP growth in 2006, 
on which the 2006 budget is based, is unlikely, absent an 
immediate acceleration in growth.  Acceleration in growth 
requires further structural reforms.  However, even if any 
were implemented (no major reforms are contemplated), they 
would not have any immediate effect. 
Stapelton