VZCZCXRO4264
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHFR #3464/01 1431238
ZNR UUUUU ZZH
R 231238Z MAY 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 7706
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 PARIS 003464 
 
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:  FRENCH GDP GROWTH ON A 2 PERCENT TREND 
 
 
¶1. SUMMARY.  Annualized French GDP growth of 2.0% in Q-1 shows 
stable but hardly dynamic improvement.  The government is sticking 
to its GDP forecast range of 2.0-2.5% in 2006, accompanied by a 
decrease in the unemployment rate to 9% by the end of 2006. 
However, preliminary employment data showed poor job creation in 
Q-1.  The government said that 2006 privatization proceeds would be 
used to reduce public debt to 64.6% of GDP.  END SUMMARY 
 
GDP Growth Rebounds in Q-1 
-------------------------- 
¶2.  Based on the National Statistical Agency (INSEE) flash estimate, 
GDP (seasonally and workday adjusted) increased 2.0% (annualized) in 
Q-1 compared with 1.2% in Q-4 2005.  GDP growth accelerated mainly 
due to a significant 3.6% increase (annualized) in household 
consumption and a rebound in exports that increased 9.0% compared 
with Q-4 2005.  The increase in exports was essentially due to the 
global economic recovery, but also to improved price-competitiveness 
(largely before the dollar began its fall against the euro).  Lower 
growth in imports also contributed to GDP growth.  Corporate 
investment and inventories detracted from GDP growth. 
 
¶3.  The Q-1 growth rate is lower than the forecast of most local 
economists and the Bank of France.  The Bank of France forecast GDP 
to increase 2.8% (annualized) in Q-1, and economists 2.4%. 
 
Government Shows Optimism 
------------------------- 
¶4.  Finance Minister Thierry Breton confirmed that the government 
was sticking to its 2.0-2.5% GDP growth forecast for 2006, saying 
GDP growth might have been as high 2.8% (annualized) in Q-1 - INSEE 
may revise its GDP data later. Prime Minister Dominique de Villepin 
told Parliament on May 16 that GDP growth "would exceed 2%" in 2006.Q The government predicted the unemployment rate would decrease to 9% 
by the end of the year, down from 9.5% in March 2006, even though 
job creation in the non-farm private sector (in companies with more 
than 10 employees) increased a mere 0.1% (20,000 jobs) in Q-1. 
Despite the increase in oil prices, Breton said he did not foresee 
any significant "effect on the inflation rate."  Breton welcomed the 
"clear recovery" in exports since the summer of 2005.  The current 
account deficit narrowed significantly in March compared to January 
and February.  For the first quarter, however, the total current 
account deficit (seasonally adjusted) widened to 8.82 billion euros 
compared with 5.3 billion euros in Q-1 2005. 
 
Good Performance in Q-2; but Risks Remain 
----------------------------------------- 
¶5.  Industrial surveys, including the investment survey, indicate 
that GDP growth could accelerate in Q-2.  Risks remain the same, 
since the strong euro could undermine French exports, and further 
increase in oil prices could be harmful to consumption and corporate 
investment.  French Central Bank Governor Christian Noyer said that 
the French economy would probably weather these risks, indicating 
"we don't see signs of slowdown at this moment.  However, we need to 
remain extremely vigilant and act in an appropriate way if needed." 
 
Finance Minister: Debt Decreasing by the end of 2006 
--------------------------------------------- ------- 
¶6.  In his May 19 conference, Breton said that the privatization of 
highways, plus the sale of government stakes in Alstom and Aeroports 
de Paris (the airports authority/operator), would bring in 12 
billion euros in proceeds that will be used to reduce the public 
debt.  He committed to reduce the public debt to 64.6% of GDP by the 
end of 2006. 
 
OppositQ Criticizes Government 
-------------------------------- 
¶7.  Socialist politicians criticized government "self-satisfaction", 
highlighting that INSEE revised downward Q-4 GDP growth to 1.2%, and 
2005 GDP growth to 1.2%.  They underlined that Q-1 GDP was lower 
than forecast by economists, notably due to the decrease in 
corporate investment.  Socialist party general secretary Francois 
Hollande asked: "how sincerely can the government claim that our 
economy and public finances are improving?  The public debt as a 
percent of GDP increased by more than 8% of GDP in four years, and 
budget deficits will increase further."  The 2006 central government 
budget is based on the 2.0-2.5% GDP growth. 
 
Comment 
------- 
¶8.  The Q-1 GDP growth is relatively good news, even if it is lower 
than expected.  Its Achilles' heel for the long term is the weakness 
of corporate investment.  In the short term (e.g., through next 
year's elections), politicians will find it hard to turn the economy 
into a campaign issue if France maintains its slow but steady pace. 
 
PARIS 00003464  002 OF 002 
 
 
On the other hand, the government continues to be overly optimistic 
about unemployment.  Perhaps most worrisome for Breton, preliminary 
data for investment and employment indicate that economic growth may 
not be sufficient to reduce the budget deficit without more cuts in 
spending. 
HOFMANN