VZCZCXRO6574
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #0704/01 0541829
ZNR UUUUU ZZH
R 231829Z FEB 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 5132
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 PARIS 000704 
 
SIPDIS 
 
SENSITIVE 
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 SLUGGISH AT TWO PERCENT IN 2006 
 
REF: (A) Paris 653 (B) 06 Paris 7815 
 
SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET 
 
¶1. (SBU) SUMMARY: French GDP increased two percent in 2006.  Export 
growth recovered in Q-4, but GDP growth was still heavily dependent 
on consumption.  Job creation was lower than expected, although the 
unemployment rate (ILO definition) fell to 8.6 percent.  Sluggish 
growth could further complicate the political environment for 
economic reform and dampen the prospects for a more dynamic French 
economy going forward.  END SUMMARY 
 
¶2. (U) INSEE, the French National Statistical Agency, confirmed that 
French GDP increased 2.4 percent (annualized) in Q-4, well above the 
zero growth in Q-3, as rebounding exports helped offset lower 
consumer spending growth.  The foreign trade contribution to GDP 
turned positive in Q-4 after being negative in Q3.  Corporate 
investment increased 4.4 percent (annualized).  Eric Dubois, INSEE 
chief economist, stressed that GDP growth had recovered in Q-4, but 
acknowledged that the rebound was "smaller than the 3.6 percent 
initially expected." 
 
¶3. (U) For 2006 as a whole, GDP increased 2.0 percent, rebounding 
from 1.2 percent in 2005.  GDP growth was mainly led by a 2.7 
percent increase in household consumption, the best performance 
since 2000.  Corporate investment growth (3.8 percent) remained 
unchanged compared with 2005.  Despite a 3.0 percent increase to 6.2 
percent, export growth remained lower than import growth (7.1 
percent).  INSEE's Dubois found "very disappointing" the 1.4 percent 
increase in manufacturing production in 2006.  That poor performance 
was mainly due to an 8.6 percent decline in the automobile industry. 
 
 
¶5. (U) The 2006 GDP growth rate is at the bottom end of the 2.0-2.5 
percent range forecast by the government.  Finance Minister Thierry 
Breton admitted that GDP growth in 2006 was "not satisfactory."   In 
an interview with French TV channel Canal Plus, Breton argued that 
"even if we had managed to achieve 2.5% growth, I would not have 
been satisfied.  My ambition is 3.5%-4%" GDP growth."   For the 
first year since 1994, German growth outstripped that of France, and 
for the second consecutive year, France's economic growth has been 
lower than the average for the eurozone. 
 
¶6. (U) Many critics blame the sluggish GDP growth rate on a lack of 
export-orientation in the French economy.  That said, private-sector 
economists noted several positive aspects in the French economic 
outlook.  Corporate investment growth and export growth were higher 
in Q-4 compared with Q-3.  Inventories decreased in Q-3 and Q-4, a 
positive signal for potential economic growth.  The real estate 
sector slowed its rate of growth in 2006 with household investment 
up 2.5 percent, compared with 4.1 percent in 2005, a relatively 
smooth adjustment. 
 
¶7. (U) Job creation in 2006 was well below Finance Minister Breton's 
objective of creating 250,000 jobs (of which 80 percent were to have 
been in the private sector).  The French economy created a net of 
only 142,000 jobs in the private non-farm sector.  The services and 
construction sectors respectively created 151,800 jobs and 60,700 
jobs, while the industrial sector shed 70,700 jobs.  The 
unemployment rate (based on the ILO definition) decreased to 8.6 
percent in December 2006 from 9.6 percent in December 2005, 
partially due to demographic factors.  However, the methodology of 
the official unemployment rate may very well mask "hidden" 
unemployment, and certainly obscures significantly higher 
unemployment rates in some marginalized localities (ref A). 
 
Comment 
------- 
¶8. (SBU) Economic growth in 2006 remained sluggish, and the 
probability is that it will remain much the same this year (ref B). 
French economic growth is overly dependent on domestic demand, which 
presents a significant risk and a lost opportunity.  Should domestic 
consumption fall, French economic growth would stagnate.  The lost 
opportunity is a continuing failure to put in place policies - 
including more flexible labor markets -- that would help the French 
economy to capitalize on global trade and investment trends. 
Healthy domestic demand means that France should weather most 
near-term external trade disturbances, including a rise in the euro 
exchange rate against other major currencies, such as the dollar and 
yen.  However, it also means that the next government, no matter its 
market orientation, may be tempted to muddle through, to France's 
long-term detriment, if the political price of reform looks too 
high. 
 
PARIS 00000704  002 OF 002 
 
 
 
STAPLETON#