US embassy cable - 05PARIS7771

UNCLAS SECTION 01 OF 03 PARIS 007771 
 
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 ECONOMY IMPROVING, BUT UNREST MAY LEAVE 
MARKS 
 
 
NOT FOR INTERNET DISTRIBUTION 
 
1. (U) SUMMARY.  While the recent unrest in France may have 
dominated the headlines, the GOF has attempted to counter 
the negative reports with good economic news.  GDP growth 
increased 2.8% (annualized) in the third quarter, much more 
than expected.  The unemployment rate decreased to 9.8%, and 
inflation remains moderate.  For 2005, GDP growth should 
easily reach 1.5%, so the GOF remains confident in its 
prediction of 2.0-2.5% GDP growth for 2006.  The unrest will 
nevertheless leave its mark on the economy: the fall of the 
euro should help boost exports and necessary reconstruction 
will help energize the construction sector.  On the negative 
side, the tourism and insurance sectors are suffering and 
over the medium term foreign direct investment may decrease. 
If fulfilled, new social spending promises will make 
reducing the budget deficit to below 3% of GDP more 
difficult.  END SUMMARY. 
 
GDP Increased More than Expected in Q-3 
---------------------------------------- 
2.  (U) Based on the National Statistical Agency (INSEE) 
flash estimate, GDP (seasonally and workday adjusted) 
increased 2.8% (annualized) in Q-3 compared with 1.2% in Q-1 
and 0.4% in Q-2.  This is the fastest growth since Q-2 2004 
when GDP increased 3.2% (annualized).  This is also 
significantly higher than the October INSEE's forecast of 
1.6%. 
 
3.  (U) While the flash estimate did not include a 
breakdown, GDP growth is likely to have been driven by solid 
household consumption.  Consumption of manufactured products 
(which accounts for about 30% of consumption) rebounded in 
July and August, respectively 1.2% and 1.5% compared with 
June and July, respectively.  Consumer spending rose during 
the summer despite less than robust increases in real 
disposable income.  Consumer optimism may have been boosted 
by miscellaneous government measures in favor of 
consumption, and improvement in the labor market. 
 
Unemployment Decreased to 9.8% in September 
------------------------------------------- 
4.  (U) The number of unemployed has been steadily 
decreasing in the last six months.  More importantly, the 
decrease was significant enough to result in a decrease in 
the unemployment rate (based on ILO definitions) to 9.8% in 
September from 9.9% in August, and from its highest level in 
five years, 10.1% in January and February.  The improvement 
was partially due to government programs to promote job 
creation in the private and public sectors, and the Social 
Cohesion Plan, which raises the number of beneficiaries of 
government subsidized contracts.  That said, among those 
under 25 the unemployment rate remains nearly 22%, about 
twice the U.S. rate.  Youth joblessness runs around 50% in 
the suburbs where many of the more than 5 million first-and 
second-generation African and Arab immigrants live. 
 
Exports a Record in September; Industrial Production Up for 
the Second Consecutive Month 
--------------------------------------------- ------------- 
5.  (U) The foreign trade deficit narrowed in September to 
1.7 billion euros as exports increased 4.6% to a record 31.2 
billion euros.  Imports increased 2.7% to 32.9 billion 
euros.  French industrial production increased 0.2% in 
September compared with August, and 1.2% in August compared 
with July. 
 
Inflation Remains Moderate 
-------------------------- 
6. (U) The consumer price index (seasonally adjusted) 
subsided to 1.9% in October compared with October 2004, 
despite increases in consumer oil prices.  Consumer energy 
prices increased 5.0% in October compared with September, 
mainly due to a 7.3% increase in oil prices, although crude 
oil prices fell from an August record of 70.85 U.S. Dollar. 
Consumer prices excluding energy increased a moderate 1.0% 
compared with October 2004. 
 
Finance Minister Welcomes Q-3 GDP Growth . . . 
--------------------------------------------- - 
7.  (U) Finance Minister Thierry Breton went on Europe 1 
radio to announce the Q-3 data 30 minutes before the 
scheduled release by INSEE.  He welcomed Q-3 GDP growth, 
saying it was "very good news", but not a surprise because 
he has been saying for months that all lights on his 
indicators for the French economy had "turned to green."  He 
said the two weeks of unrest in French suburbs had little 
impact on GDP growth, adding that the 200 to 300 million 
euros increase in social programs in France's suburbs could 
be easily offset by cutting spending elsewhere.  The 
government promised 5,000 more teachers and 100 million 
euros for organizations in the troubled suburbs, 70,000 
additional scholarships, vocational advancement programs, 
and five new tax-free zones for investors.  Breton expressed 
confidence that France would enjoy much higher economic 
growth in the second half than in the first half of 2005, 
adding that the Q-3 GDP growth of 2.8% showed that "GDP 
growth of 2.0-2.5% in 2006 is perfectly realistic and 
achievable."  Before the release of INSEE's Q-3 GDP data, 
the IMF had forecast French GDP to increase 1.5% in 2005 and 
1.8% in 2006. 
 
 . . . but Fears an Increase in European Interest Rates 
--------------------------------------------- ---------- 
8.  (U) Bank of France Governor Christian Noyer said that Q- 
3 GDP growth was encouraging, but he was favorable to an 
increase in European Central Bank interest rates as "the 
inflation risk in Europe is the factor that is threatening 
economic growth the most."  He said that the EU inflation 
rate was close to 2.5%, and might not decrease quickly to 
2.0%.  Breton, along with his European counterparts, said he 
was opposed to an increase in ECB interest rates that could 
kill economic growth.  He said, "inflation in France is 
totally under control, there is no related rise in wages, 
and the euro is at the right level."  Ernest-Antoine 
Selliere, the French head of UNICE, the European federation 
of businesses, called for the ECB to not increase interest 
rates as it would be a negative signal for European economic 
growth. 
 
Impact of the Unrest on: 
-- Foreign Direct Investment 
---------------------------- 
9.  (U) From a macro-economic point of view, most analysts 
see the unrest as a mixed bag.  The greatest damage from the 
unrest is the deterioration in France's attractiveness to 
foreign direct investment.  Not surprisingly, the head of 
the Invest in France Agency (AFII), Clara Gaymard, 
downplayed the situation, saying that foreign investors 
understood that a limited group of young people were at the 
origin of the unrest, not the broader French population, 
which has requested a return to order.  She said that 
foreign investors focused on the quality of research, 
training, and infrastructure to define their investment 
strategies.  She disagreed with head of the business 
confederation MEDEF, Laurence Parisot, who called the 
economic consequences of the violence "very serious." 
 
-- on the Budget Deficit: 
------------------------ 
10.  (U) The unrest is certain to affect the budget, notably 
the 2006 budget deficit, which the government is trying to 
keep below 3% of GDP.  The impact of the unrest on the 
budget may be larger than indicated by Breton.  Analysts at 
Credit Agricole-LCL, France's largest bank, have calculated 
that to meet its new promises, the government would have to 
boost budget spending by 2 billion euros.  Simply fulfilling 
its promise to hike spending on urban renewal by 25% would 
cost 1 billion euros. 
 
-- on the Tourism and Insurance Sectors 
--------------------------------------- 
11.  (U) The tourism sector fears a fall in business during 
the Christmas period, particularly if heavy news coverage of 
the unrest continues.  Companies offering city tours are 
especially worried about a drop-off during the holiday 
season.  According to French reports, up to 30% of the trips 
booked to Paris by travel agencies in the U.S. have been 
cancelled since the unrest began. 
 
12.  (U) The direct losses for the insurance sector due to 
the unrest are considerable, but the French Federation of 
Insurance Companies (FFSA) has dismissed any expressions of 
concern.  The FFSA estimated that 20 million euros in claims 
for the 6,600 cars that were burned, and put total insurance 
claims, including damage to sports facilities, schools and 
businesses, at 200 million euros.  This compares with 7 
million euros in fire damage claims each year in France. 
 
-- on the Building Sector 
------------------------- 
13.  (U) The building sector could benefit from the 
situation as soon as 2006 since all damaged buildings and 
facilities will have to be rebuilt.  Before the unrest, the 
government had already promised to accelerate the 
construction of public housing (as part of its Social 
Cohesion Plan), promising to reach its objective in 18 
months, before the June 2007 presidential elections. 
 
Comment 
------- 
14.  (U) Some economists believe that relying on consumption 
as a driver for French GDP growth is a cause for concern. 
Since consumption depends heavily on consumer confidence, 
which itself depends largely on employment and wages, strong 
Q-4 growth cannot be taken as a foregone conclusion.  An up 
tick in inflation or a resurgence of civil unrest could 
result in a downward correction in Q-4.  On the other hand, 
the fall of the euro in November against the U.S. dollar, 
which was partially due to a lack of confidence related to 
the unrest in France, has brightened prospects for 
exporters, and the drop in energy prices has helped lift 
European business confidence to a nine-month high in 
October.  Therefore, an increase in exports could partially 
offset a downward correction in consumption.  Stock exchange 
markets have not reflected anticipations of lower economic 
growth in the short-term.  The blue-chip CAC 40 index 
increased to 4,541.82 on November 11 due to the rise on Wall 
Street, the decrease in oil prices, and the decrease in the 
euro.  The index continued increasing on November 14. 
Importantly, investors have been taking their cues from U.S 
economic indicators, not the French economic situation. 
HOFMANN