Cablegate: French Eonomic Growth Sluggish

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

011117Z Sep 05

UNCLAS SECTION 01 OF 03 PARIS 005936

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 EONOMIC GROWTH SLUGGISH

Ref: Paris 5694

1. SUMMARY. French GDP increased a low 0.4% (annualized) in
the second quarter. The rise in oil prices and the euro in
the third quarter caused fears that 2005 economic growth
could be lower than government forecast of 2.0%.
Eventually, the government reduced its GDP growth forecast
to 1.5-2.0%. On September 1, just before the end of the 100-
day period to restore confidence, the Government is expected
to introduce new measures to spur economic growth (septel).
These are likely to increase the central government budget
spending, and thus the already-bloated budget deficit. END
SUMMARY.

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GDP Growth Low in Q-2
---------------------

2. On August 19, the National Institute for Statistical and
Economic Studies (INSEE) confirmed its August 12 flash
estimate of a 0.4% (annualized) increase in Q-2. GDP growth
weakened in Q-2 compared with 1.6% (annualized) in Q-1
(revised upward from 1.2%). The Q-2 GDP growth is lower
than private-sector economists' forecasts of 0.8%
(annualized) and fell well below the 2.0% (annualized) Bank
of France's forecast. In 2004, GDP had increased 2.1%,
notably due to the 2.8% (annualized) Q-4 rebound.

--------------------------------------------- --------
Consumption and Corporate Investment Decreased in Q-2
--------------------------------------------- --------

3. The poor Q-2 performance was mainly due to a 1.2%
(annualized) drop in household consumption in Q-2, the
biggest decrease since 1996. Consumption was undermined by
worries about oil prices and unemployment. The unemployment
rate remained at a five-year high of 10.2% in April and May,
edging down to 10.1% in June. (Macro-economic analysis of
the labor situation will be provided in a separate cable.)

4. Corporate investment decreased 1.6% (annualized) as non-
financial firms significantly reduced their investment
(minus 4.8% annualized). Surveyed industrialists said that
rising oil prices and the decrease in the euro in the first
half did not encourage industrialists to invest. The
capacity utilization rate remained low (82.6% in June).

--------------------------------------------- --------
Q-2 GDP Growth was led by Inventories and Real Estate
Investment ...
--------------------------------------------- --------

5. Inventories had a significant 0.4% contribution to GDP
in Q-2, notably because of durable increases in raw
materials prices. GDP growth excluding inventories would
have been negative, minus 1.2% (annualized). Real estate
investment increased 2.8%, amplifying the real-estate
bubble.

-----------------
. . . and Exports
-----------------

6. Exports rebounded in Q-2, increasing 4.0% (annualized)
after decreasing in Q-1, while imports continued to
increase, up 5.3% (annualized). Based on Customs data,
exports hit a record of 175.8 billion euros in the first
half as exports surged 30 billion euros in April and May,
partially due to the sales of 107 Airbuses (6.5 billion
euros) and capital goods. The French foreign trade posted a
high 11.2 billion euros deficit in the first half due to an
increase in imports, notably imports of energy (17.2 billion
euros). The energy deficit was responsible for around 50%
of the increase in the energy deficit in the first half.

7. Foreign Trade Minister Christine Lagarde stressed that
"continued bearish economic export growth in the euro zone
was harmful to French foreign trade." Weak exports to
France's two main trading partners, Germany and Italy,
dragged down the overall gains. Lagarde blamed the increase
in the euro in 2003 and 2004 for harming French export-
orientated companies. Commentators stressed that Germany
(unlike France) benefited from strong demand for its hefty
industrial products.

--------------------------------------------- --------------
Government Revised Downward GDP Growth Forecast to 1.5-2.0%
--------------------------------------------- --------------

8. INSEE's chief economist Michel Devilliers said "we are
in a phase of a not so great quarter, but it will be
followed by a progressive recovery." His comment echoed
that of the European Commission, which forecast on August 11
an acceleration in the euro zone growth to the fastest pace
in almost two years at the end of 2005. It said that the
European central bank, which held its benchmark interest
rate at a six-decade low of 2%, would help underpin a
recovery in the euro zone.
9. Finance Minister Thierry Breton said "we clearly sense,
for example with recent business confidence data, industrial
production and company creation, that indicators are
beginning to return to green. We are confident for the
second half." Nonetheless, on August 31, he admitted that
2005 economic growth was below 2%. He said the government
revised its GDP growth forecast to 1.5-2.0% from 2.0%,
reiterating that "the worse was behind us" as the
unemployment rate dropped below 10% mark, to 9.9% in July,
hitting the lowest level in two years.

-------------------------------------------
IMF Revised Downward 2005 Forecast to 1.75%
------------------------------------------

10. In July, IMF revised its forecast of the 2005 French
economic growth to 1.75% from 2%, and forecast GDP to
increase slightly above 2% in 2006 due to improved business
climate and increased domestic demand benefiting from an
increase in the euro. That said, IMF warned "important
uncertainties" related to oil prices and possible
sluggishness of foreign demand if France's European partners
subsisted. On their part, private-sector economists warned
about rising oil prices, weak job market and strong euro,
which would limit economic recovery in the second half and
restrict 2005 GDP growth to 1.5%.

--------------------------------------------- --------------
Main Downside Risks: Increasing Euro, High Oil Prices, Lack
of Competitiveness
--------------------------------------------- --------------

11. Some economists deemed exports would benefit from the
delayed effects of the weakness of the euro, which declined
9% in the first half. Nonetheless, the recent rise in the
euro (up to USD 1.2468 on August 11) and in France's foreign
trade deficit renewed fears about a negative impact of a
strong euro on export growth.

13. The continuous rise in high oil prices above 65 USD a
barrel has been causing concerns about the fragility of
economic recovery through its impact on prices consumption,
investment, and imports. Lagarde estimated that the energy
trade deficit could increase to 40 billion in 2005 from USD
29 in 2004. Regarding the preparation of the 2006 budget,
Breton said the government set average oil price of USD 50
per barrel (versus USD 36 in the 2005 budget). Although
energy prices for consumers are surging (up 12.5% in July
compared with July 2004), inflation remained under control
since consumer prices increased 1.7% in July compared with
July 2004.

14. Economists, notably well-respected Head of the
Government Economic Analysis Council ("Conseil d'Analyse
Economique") Christian De Boissieu blamed France's weak
trade performance on a lack of competitiveness. He
highlighted that the French industry was unable to benefit
as its competitors from increased demand from emerging
economies. The Government commissioned a report to the
Council in December 2004. The report will be delivered by
the end of the year.

--------------------------------------------- --------------
Rise in Oil Prices Cause Reactions from Politicians, Unions
And Professionals
--------------------------------------------- --------------

15. Because of the surge in oil prices, the socialist
party, the center-right UDF, some ruling-majority UMP
members, and unions of transport professionals called for
fuel price concessions. Socialists called for the
reactivation of the variable tax on petroleum products (Taxe
Interieure sur les Produits Petroliers Flottante -"TIPP
flottante") to limit the impact on consumers of high oil
prices. Fuel levies (74% tax on gas and 67% tax on diesel
paid by motorists) are split between value-added tax of
19.6% and a volume-based TIPP, which is forecast to raise E
20 billion in 2005. The variable tax had been introduced by
the former socialist government, but was abolished by former
Prime Minister Jean-Pierre Raffarin in 2002. Socialists
advocated that not reactivating the variable tax was harmful
to consumers, and therefore to economic growth. At the
other end, the Greens and the National Federation of
Associations of Transport Users were opposed to a decrease
in the TIPP, arguing that drivers must be made aware of
their responsibilities, and were favorable to a decrease in
consumption of oil products.

16. Rising oil prices may give unions new arguments to
protest unless the government takes action to boost jobs and
real incomes. Left unions FO and CGT leaders had already
planned to demonstrate against the new type of hiring
contract that allows companies of up to 20 employees to lay
off workers anytime during the first two years of employment
(Paris 5694).

--------------------------------------------- --------------
Government Will Not Reactivate Floating Tax on Oil Products
--------------------------------------------- --------------

17. In an August 16 press conference, Prime Minister
Dominique de Villepin ruled out a reactivation of the
floating TIPP, arguing it was "extremely expensive" for the
GOF and "for a relatively limited impact for the consumer."
He said he preferred measures to encourage job growth as
opposed to increased consumption of gasoline and other
"polluting products" since the government made the fight
against the global warming one of its priorities. Villepin
said he would be careful that measures would help sectors
deal with higher oil prices, and promised that excess
revenues from tax on oil products will be returned to low-
income workers, and to sectors the most exposed to the
recent surge in oil prices, notably transport professionals.
An independent commission will assess the amount of excess
revenues from tax on oil products at fall. Finance,
Transport, Ecology and Industry ministers will participate
in a round table to evaluate the situation. Villepin urged
oil companies including Total to increase refinery capacity,
saying supply shortage caused price increases. He also
asked French motorists "to show a spirit of responsibility"
by reducing their average speed by 10 km per hour, which, he
said, would save money.

--------------------------------------------- -----------
Government Prepares a New Set of Measures to Spur Growth
--------------------------------------------- -----------

18. Villepin, who promised after taking office in June to
restore confidence to the French within 100 days (by
September 8), said that the government was preparing a set
of new measures to boost economic growth. He will unveil
his program on September 1. According to the press, the
government could encourage employees' stock holding, wage
negotiations by sector, job creation through tax incentives,
and would finance measures with future privatization
proceeds.

--------
Comments
--------

19. The Q-2 low GDP growth and rising oil prices are
contributing to doubts about the Government's ability to
spur economic growth in 2005. The government has already
accounted for this situation since Villepin warned about a
new program to be announced September 1, just a week before
the end of the 110-day period, and eventually admitted that
GDP growth was more in the 1.5%-2.0% range than close to
2.0%.

20. The government is taking measures although its room for
maneuver is limited by a bloated government deficit and
debt. Measures are likely to swell central government
budget spending since the bulk of 2005 proceeds are used to
cut public debt.
STAPELTON

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