VZCZCXRO5923
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHFR #2046/01 0881648
ZNR UUUUU ZZH
R 291648Z MAR 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 5754
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 PARIS 002046 
 
SIPDIS 
 
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:   FRANCE GDP FORECAST TO PICK UP in 2006 
 
 
¶1. SUMMARY.  The National Statistical Agency forecast that 
French GDP would rebound in the first half of 2006, 
increasing 2.4% (annualized) in Q1 and 2.0% in Q2, mainly 
led by household consumption.  GDP growth could run at a 
pace close to 2.0% (annualized) in the first half, and in 
full year 2006 as well, picking up from 1.4% in 2005. 
However, consumption and corporate investment growth 
forecasts are questionable.  END SUMMARY 
 
GDP Growth Pick Up In the First Half . . . 
------------------------------------------ 
¶2.  In its March review of the French economy, the National 
Statistical Agency, INSEE, forecast GDP to rebound in the 
first half of 2006, increasing 2.4% (annualized) in Q1 and 
2.0% in Q2.  INSEE's chief economist Michel Devilliers said 
that "GDP growth would improve after a mixed 2005" and "the 
lower end of the government's forecast for 2006 of 2.0-2.5% 
is within reach, providing the French economy keeps 
increasing at the first-half pace in the second."  INSEE's 
2006 GDP growth estimate is line with the 2.1% OECD 
forecast, but exceeds the 1.8% IMF prediction. 
 
¶3.  Avian Flu:  INSEE made an estimate of the impact of 
spread of bird flu to poultry in France, saying it would 
have a minimal 0.02% negative impact on Q-1 GDP.  The 
decline is related to a decrease in poultry exports. 
 
. . . Mainly led by Household Consumption 
----------------------------------------- 
¶4.  INSEE forecast household consumption, which accounts for 
56% of GDP, to be robust in the first half of 2006. 
Devilliers stated that household consumption would remain 
the main engine behind economic growth, with a 2.8% 
(annualized) increase in Q-1 and 2.4% in Q-2.  Partial 
information confirmed robustness of consumption in Q-1. 
Household consumption of manufactured products increased 
1.8% in February compared with January, after a 0.5% 
increase in January.  According to INSEE, consumer spending 
will be supported by a 1.2% increase in purchasing power in 
the first half.  With the stabilization of crude oil prices 
at USD 60 per barrel, INSEE forecast inflation to slow to 
1.6% in June compared with June 2005. 
 
Government-subsidized Contracts Boost Job Creation... 
--------------------------------------------- -------- 
¶5.  Assuming that consumption growth is more driven by 
employment than by indebtedness (French indebtedness 
generally is incurred to smooth out decreases in purchasing 
power, unlike the U.S. where debt more often is used to 
maintain a certain lifestyle), INSEE forecast that 
consumers' purchasing power will be stimulated by a gradual 
decrease in the unemployment rate to 9.2% in June from 9.6% 
in January.  INSEE estimates that 100,000 new jobs could be 
created in the first half of 2006, compared with 85,000 in 
the full year 2005, thanks to government-subsidized 
employment contracts.  85,000 government-subsidized 
contracts versus 35,000 in full year 2005 would be created, 
corresponding to a significant increase in the number of 
contracts in the government sector, and in the private 
sector as part of the Social Cohesion Plan.  INSEE forecast 
creation of only 25,000 non-government subsidized jobs in 
the private sector in the first half of 2006 compared with 
50,000 in 2005.  Job cuts in the industrial sector would be 
offset by creation in the construction (15,000) and services 
(45,000) sectors. 
 
¶6.  Interestingly, INSEE made a first estimate of job 
creation through the new contract for employment ("Contrats 
Nouvelles Embauches" - CNE) launched in August 2005 that 
allows employers in small-and-medium sized companies to lay 
off employees with no official reason in the first two 
years.  INSEE shares the views of two senior labor 
economists, Pierre Cahuc and Stephane Carcillo, that only 
10,000 to 20,000 jobs will be created per quarter thanks to 
CNE.  This is much less than government's estimate of more 
than 400,000 CNEs.  Devilliers summarized "CNE will have 
little impact on the labor market." 
 
Household Investment Steady; Corporate Investment Slow 
--------------------------------------------- --------- 
¶7.  Devilliers said that construction and real estate 
sectors had significant contributions to GDP growth in 2005. 
According to INSEE, household investment will increase 3.2% 
(annualized) in Q-1, and 3.6% in Q-2 as effervescence in 
 
PARIS 00002046  002 OF 002 
 
 
this sector should continue. 
 
¶8.  INSEE forecast corporate investment growth to slow 2.0% 
in Q-1 from 4% in Q-4 2005 when the manufacturing sector did 
not perform well.  It expects a return to 4.0% growth in Q-2 
due to tightening of production capacities.  Low real 
interest rates will continue to create favorable conditions 
for borrowing. 
 
Imports Are Stimulated by Domestic Demand 
----------------------------------------- 
¶9.  Buoyant consumer spending will continue to boost 
imports.  INSEE forecast imports to increase 6.6% in Q-1 and 
6.1% in Q-2.  The foreign trade deficit will have a zero 
contribution to GDP in Q-1 and a 0.1% negative contribution 
in Q-2. 
 
Exports Do Not Benefit from International Environment 
--------------------------------------------- ------ 
¶10.  In early 2006, INSEE described France's international 
environment as favorable ("porteur de croissance"), arguing 
that the euro zone will benefit from strong growth in the 
United States (4.2%), Japan (4.2%), and the U.K.(2.2%). 
Surveys indicate an improvement in the business climate in 
the euro zone.  Expecting the euro to stay close to USD 
1.20, INSEE forecast French exports to increase 7.4% in Q-1 
and 5.3% in Q-3.  INSEE economist Karine Berger stressed 
that "France has failed to hook up to world economic 
growth," and France would not recapture markets lost in 
¶2005.  Exports increased 2.3% in 2005 when global demand 
climbed 5.5%.  Berger said, "that means that France lost 
market share overseas." 
 
¶11.  Taking into account uncertainties about France's market 
share abroad and the price competitiveness of French 
products, Devilliers warned that the foreign trade deficit 
could be significantly worse in 2006 after having negative 
contributions of 1.1% to GDP in 2004 and 1.0% in 2005. 
 
Upside and Downside Risks 
------------------------- 
¶12.  INSEE sees "a more marked economic recovery in 
Germany," France's main economic partner, which should 
benefit French exports.  Any increase in German domestic 
demand including the effect of the 2006 world soccer cup on 
construction, tourism and consumption of high-tech goods in 
Germany could benefit French trade.  INSEE did not rule out 
the downside risk of a higher-than-expected trade deficit 
due to a dynamic world economy, which could push oil and raw 
materials prices higher, and thus increase imports. 
Widening trade deficits would dent economic growth and 
employment. 
 
Comment: 
-------- 
¶13.  The corporate investment growth forecast remains a 
potential problem.  Finance ministry chief economist Gerard 
Belet confirmed to us that corporate investment has not 
increased sufficiently, although companies made profits and 
reduced indebtedness, cash flow is healthy, and interest 
rates are low.  He stressed that large companies mostly 
invested (and, by extension, created jobs) abroad.  Domestic 
investment involved purchases of software and computers, but 
this had no effect on production capacities. 
 
¶14.  The preliminary results of government policies to 
stimulate employment are disappointing, with less enthusiasm 
from the private sector than the government had expected. 
Unrest caused by the new employment contract for the youth 
("Contrat Premiere Embauche - CPE) indicates that 
substantial labor market reforms are unlikely in the short 
and medium terms. 
STAPELTON