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

141055Z Feb 06

UNCLAS SECTION 01 OF 02 PARIS 000929 
 
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 SLOWS IN Q4 2005 
 
Ref:  05 PARIS 7771 
 
¶1. SUMMARY.  France's Q-4 GDP growth of 0.8% (annualized) 
means that GDP only increased 1.4% in 2005, down from 2.1% 
in 2004.  Foreign trade contributed negatively to GDP 
growth, posting a record deficit.  The Government reiterated 
it still would meet its objective to reduce the budget 
deficit to below 3% of GDP in 2005.  END SUMMARY. 
 
GDP Growth Slows in Q-4 
----------------------- 
¶2.  Based on the National Statistical Agency (INSEE) flash 
estimate, GDP (seasonally and workday adjusted) increased 
0.8% (annualized) in Q-4 compared with 2.8% in Q-3.  For the 
year, GDP therefore only increased 1.4%, compared with 2.1% 
in 2004, below the government's 1.5-2.0% target range. 
While the flash estimate did not include a breakdown, GDP 
growth is likely to have been driven by sluggish household 
consumption, which had driven GDP growth in previous 
quarters.  Falling industrial production, notably in the 
automobile sector, November's civil unrest (reftel) and the 
foreign trade deficit had a negative impact on economic 
growth in Q-4.  Finance Minister Thierry Breton blamed 
technical stoppages in the automobiles sector (ten days in 
several Renault's and PSA Peugeot Citroen's concerns). 
Industrial production decreased 0.3% in December compared 
with November.  According to head of macro-economic 
forecasts Michel Devilliers, the agriculture sector also 
contributed to the poor Q-4 performance. 
 
GOF Maintains Optimism 
---------------------- 
¶3.  Breton stressed that GDP estimates could be revised 
upward as "the Q-4 GDP growth figure is not totally in line 
with what can be observed in facts", saying he was sticking 
to the government 2.0-2.5% GDP forecast for 2006.  He added 
he is still "very confident" about cutting the budget 
deficit to below 3% of GDP in 2005 since "the tax receipts, 
whether in corporate tax and VAT, were good, better than we 
expected." 
 
¶4.  Devilliers indicated that 2% GDP growth in 2006, the low 
of the government GDP growth forecast, was still achievable. 
He admitted that Q-4 GDP growth was lower than INSEE's 
forecast of 2.0% (annualized), but said that GDP growth was 
running in early 2006 on a 2.0% (annualized) pace. 
 
Foreign Trade Deficit hit a Record 26.4 billion euros 
--------------------------------------------- -------- 
¶5.  The foreign trade deficit (FOB/FOB) including military 
equipment more than tripled to 26.4 billion euros in 2005 
compared with 2004.  Imports increased 9.2% to 382 billion 
euros.  The increase in imports was mainly due to the cost 
of imported energy, which resulted in an increase in the 
energy deficit to 37 billion euros.  Purchases of imported 
consumer goods from China increased to 21 billion euros in 
2005 from 17 billion euros in 2004.  Exports increased 4.1% 
to 355 billion euros, helped by strong growth in exports to 
India (42%), China (15%), and the U.S. (9%).  Nonetheless, 
France's export performance was not as good as the 7.5% 
increase that Germany's exports enjoyed in 2005 (totaling 
786.1 billion euros). 
 
¶6.  Some private-sector economists explained the 
deterioration in French foreign trade was due to a lack of 
competitiveness of exports due to high labor costs.  Some 
economists disagreed that labor costs fully explained export 
performance, especially when comparing performance with 
Germany since labor costs in Germany were also high.  In 
their view, the export mix was more important.  Germany 
produced capital goods, for which demand was strong, but 
France continued to produce consumer goods that face the 
strong price competition, and had low market presence in 
emerging economies, notably in Asia and in Central Europe. 
 
¶7.  Trade Minister Christine Lagarde affirmed "the trade 
deficit was not worrying," stressing that France is not the 
only industrialized country with a trade deficit, and a 
trade deficit did not impede an economy to grow, citing the 
U.K and the U.S.  She emphasized that French exports did 
well by historical standards, but acknowledged that France 
has not enough medium-sized companies involved in foreign 
trade.  In response, the government has launched a program 
named Cap Export, which regroups measures in favor of export 
credits, subsidized insurance premiums, tax exemptions, and 
tax credits. 
 
Comment 
------- 
¶8.  The main policy question to ask is whether the slowdown 
in growth is due to transitory reasons (e.g., high oil 
prices, trouble in the suburbs), as claimed by the GOF. 
Another possibility is that anemic growth is due to policy 
reasons (e.g., a social system for an aging demographic that 
increases labor costs; high tax rates and other policies 
that distort, if not stifle, productive investments that 
would lead to a better export mix).  If the latter is true, 
and we think so, GDP growth for 2006 is most likely not 
going to attain the GOF target of 2%, and France's sizable 
but mature economy will continue to gradually slow down.