VZCZCXRO1867
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHFR #5073/01 2071434
ZNR UUUUU ZZH
R 261434Z JUL 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 9824
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 PARIS 005073 
 
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: CONSUMPTION KEEPS FEEDING THE FRENCH ECONOMY 
 
REF: PARIS 4417 
 
¶1. SUMMARY.  The unexpected rise in French consumption of 
manufactured products in June confirms solid economic growth in the 
second quarter.  The French Finance Minister said the data supports 
his 2006 GDP growth forecast of 2.0 to 2.5 percent.  However, 
recovery of consumer spending in Germany and Italy, France's main 
trading partners, remains fragile, creating doubt about continued 
growth of French exports.  End summary. 
 
Consumption was High in Q-2 
---------------------------- 
¶2.  Consumption of manufactured products (adjusted for workdays and 
seasonally adjusted) increased for the third consecutive month, up 
1.7 percent (excluding inflation) in June compared with May, the 
highest monthly increase in 2006.  The latest numbers surprised many 
economists, most of whom were expecting a lower increase after good 
performances in April (a 0.5 percent increase compared with March) 
and May (a 0.9 percent increase compared with April).  Consumption 
of manufactured products rose 1.5 percent in Q-2, and this on the 
heels of a significant 1.2 percent increase in Q-1.  The effect of 
the soccer World Cup on consumer electronics purchases (including 
flat screen televisions) combined with the start of one of two 
bi-annual sales periods, dynamic real estate investment and special 
offers on automobiles benefited many different sectors.  Other more 
fundamental factors, such as lower interest rates, higher home 
prices, and, to a lesser extent, moderate increases in purchasing 
power and job creation, may explain the strength of consumption in 
recent months. 
 
Consumers Benefit from Prices of Imported Goods 
--------------------------------------------- -- 
¶3.  In recent months, consumption has been focused primarily on 
imported goods, whose prices have been very competitive.  The euro's 
relative strength also contributed to the increase in imports of 
consumer goods, offsetting the impact of oil price increases on 
purchasing power.  Eric Dubois, senior economist at the National 
Statistical Institute (INSEE), confirmed that "the impact of high 
oil prices on inflation has been offset by the decrease in prices of 
many other products." 
 
Low Interest Rates Encourage Consumption 
---------------------------------------- 
¶4.  Low interest rates and rising home prices encouraged consumer 
lending.  Consumer loans have surged 32.7 percent since the spring 
of 2003.  The rate of consumer indebtedness (indebtedness as a 
percent of disposable income) was close to 66 percent in Q-2.  Marc 
Touati, Natexis Banques Populaires's senior economist, stressed that 
"it is well below rates in the U.S. (133 percent) and in Spain (90 
percent), but it is an historical high in France."  At the same 
time, the savings rate continued to decrease, declining from 17.7 
percent in 2002 to 14.6 percent in 2006, one of the lowest levels 
since 2000. 
 
Economists Wonder about Durability of Consumption 
--------------------------------------------- ---- 
¶5.  Manufactured products account for less than one third of 
household consumption, but economists are now convinced that overall 
household consumption (including food and services) continued at 
full speed throughout Q-2.  Morgan Stanley's Chief Economist Eric 
Chaney warned of a consumption slowdown in Q-3, noting that the 
World Cup's effect would by then be over.  He expects any moderate 
increases in interest rates should decrease demand for consumer 
loans.  The ECB could raise its benchmark rate from 2.75 percent to 
3 percent given the pick up in the euro zone economy and record oil 
prices.  Chaney forecast household consumption would increase by 2.4 
percent in 2006, "a robust performance by European standards." 
Touati warned that "despite its apparent vigor, consumption remains 
fragile; job creation (150,000) and increases in purchasing power 
(1.7 percent) might be insufficient to maintain the current level of 
consumption that is so heavily dependent on indebtedness."  Natexis 
Banques Populaires's estimates are lower than INSEE's forecasted 2.6 
percent rise in household consumption, itself based on the creation 
of 196,000 new jobs and a 2.4 percent increase in purchasing power 
in 2006 (reftel). 
 
Government Confirms its GDP Growth Forecast 
------------------------------------------- 
¶6.  On July 17, before the publication of consumption data, the Bank 
of France predicted GDP would increase 2.4 percent (annualized) in 
Q-2 compared with Q-1, when it grew 2.0 percent.  The Bundesbank 
indicated that German economic growth was "markedly faster" in Q-2 
than in Q-1, when it was 1.6 percent (annualized).  According to the 
European Commission, economic growth in the euro zone will 
 
PARIS 00005073  002 OF 002 
 
 
accelerate to the fastest level in more than two years by the end of 
¶2006.  On July 25, Finance Minister Thierry Breton said on Europe 1 
that "the French economy picked up very nicely," confirming the 
government's GDP growth forecast in the range of 2.0-2.5 percent 
this year.  He said that the declining unemployment rate explained 
"why the French are spending more," and the unemployment rate could 
decrease to below 9.0 percent by the end of the year, and to 8.7 
percent or even 8.5 percent by July 2007.  Interestingly, French 
business confidence increased in July to a five-year high. 
 
Comment 
------- 
¶7.  Household consumption including food and services was certainly 
more robust in Q-2 than in Q-1.  Even if consumption returns to a 
more moderate pace in the second half of the year, household 
consumption is likely to post an overall 2.5 percent increase for 
2006, which should mean at least a 2 percent GDP growth rate for 
this year as well.  However, according to analysts, consumption 
growth in France's major partners, Germany and Italy, who also 
benefited from the soccer World Cup, does not look sustainable and 
might not boost French exports permanently (ref).  Foreign demand 
from Germany and Italy may even weaken in 2007 due to the 
implementation of tax increases in the two countries next year. 
 
STAPELTON#