Cablegate: French Q-1 Gdp Increased Much Less Than Expected

This record is a partial extract of the original cable. The full text of the original cable is not available.

241513Z May 05

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
--------------------------------------

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."

--------------------------------------------- --------
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#

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