VZCZCXRO0863
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #4273/01 2891629
ZNR UUUUU ZZH
R 161629Z OCT 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 0798
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 02 PARIS 004273 
 
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SENSITIVE 
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PASS FEDERAL RESERVE 
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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 NATIONAL STATISTICAL AGENCY REVISES DOWNWARD 2007 
GDP GROWTH 
 
REF:  Paris 2791 
 
¶1. (U) SUMMARY:  INSEE, the French National Statistical Agency, 
forecasts real GDP to increase 1.8 percent in 2007 compared with 2.2 
percent in 2006.  Similar to OECD and European Commission forecasts, 
INSEE's projections are below the lower bound of the GOF's 2.0-2.5 
percent forecast.  Nonetheless, the government continues to stick to 
its forecast, in part because delivering economic growth messages is 
vital to rally support for deep reforms.  END SUMMARY 
 
INSEE Forecasts GDP to Increase 1.8 Percent in 2007 
--------------------------------------------- ------ 
¶2. (U) In its latest quarterly note, INSEE revised downward its 2007 
real GDP growth forecast to 1.8 percent from the 2.1 percent 
estimate of June (reftel).  The revised forecast takes into account 
the low 1.2 percent (working-day corrected; seasonally adjusted; 
annualized) increase in Q-2, which was due in part to moribund 
corporate investment and a decline in German industrial production. 
INSEE expects an upswing in the second half, forecasting GDP to 
increase 2.8 percent (working-day corrected; seasonally adjusted; 
annualized) in Q-3 in line with France's euro partners, notably 
Germany, and 2.0 percent (working-day corrected; seasonally 
adjusted; annualized) in Q-4.  The expected growth in Q-3 represents 
a "simple technical rebound" from the second quarter.  Summer 
turbulence on the financial markets is expected to have a moderate 
impact on economic growth in Q-4.  Looking ahead, the potential for 
continued turbulence is the main factor of uncertainty in INSEE's 
forecast. 
 
Consumption Remains the Main Motor of Economic Growth 
--------------------------------------------- -------- 
¶3. (U) Household consumption of manufactured products has rebounded 
since June.  INSEE forecasts strong household consumption in the 
second half of 2007, leading to an annual increase of 2.1%.  It 
would remain the main motor of economic growth.  Although INSEE's 
September survey of household confidence showed increased pessimism 
about prospects for improvement in standards of living, INSEE 
analyst Pierre-Olivier Beffy argues that consumption will be driven 
by an increase in purchasing power and an improvement in the labor 
market.  Household disposable income is expected to increase 3.2 
percent in 2007 thanks to higher income and cuts in income and 
payroll taxes in the second half.  However, real disposable income 
growth will slow in the second half as inflation accelerates from an 
annual rate of 1.3 percent in August to 1.9 percent in December. 
INSEE based its forecast on oil prices at USD75 per barrel by the 
end of the year. 
 
¶4. (U) Tax Package:  INSEE estimates that income and payroll tax 
cuts for employees working overtime will result in 420 million euro 
additional income, or a 0.14 percent increase in household 
disposable income in 2007.  Cuts in inheritance taxes should put 360 
million euros in households' pockets this year. 
 
Job Creation is Significant 
--------------------------- 
¶5. (U) Job creation in the first half (212,000) was significant. 
INSEE forecast the economy will create 340,000 jobs in 2007 compared 
to 285,000 in 2006.  Government-subsidized contracts will decline, 
but the private-sector will create up to 255,000 jobs.    INSEE 
warned that unemployment figures may be affected by a current review 
of how jobless numbers are calculated in France.  There are some 
indications that the revised unemployment rate will be higher than 
the current 8.0 percent (using ILO definitions).  INSEE will publish 
the unemployment rate on a quarterly basis (versus monthly), 
starting with data for Q-3. 
 
INSEE Optimistic about Corporate Investment 
------------------------------------------- 
¶6. (U) Despite a sluggish second quarter, INSEE argues that 
corporate investment in France remains strong.  Production of goods 
and services is forecast to pick up in the second half, reflecting 
improving business confidence and recovery in the automobile 
industry.  INSEE forecasts corporate investment to increase 4.9 
percent in 2007 compared with 4.6 percent in 2006 thanks to an 
acceleration of investment growth in the second half. 
 
Contribution of Foreign Trade Remains Negative 
--------------------------------------------- - 
¶7. (U) Imports of manufactured products will be spurred by strong 
consumption, while exports of manufactured products will experience 
a "mild" loss of competitiveness due to the strength of the euro and 
less dynamic foreign demand.  However, brisk demand for food and 
 
PARIS 00004273  002 OF 002 
 
 
energy exports (due to an unusual rise in exports of refined oil 
products in July) would bring the current account into balance in 
the second half.  That said, the overall contribution of foreign 
trade to GDP growth in 2007 is estimated at minus 0.3 percent. 
 
Government Sticks to Its GDP Growth Forecast 
-------------------------------------------- 
¶8. (U) INSEE's forecast is in line with OECD forecasts, but below 
the European Commission's of 1.9 percent and significantly below the 
government 2.0-2.5 percent forecast.  Despite the INSEE report, 
Finance Minister Lagarde continues to support the government's GDP 
growth forecast.  In introducing the 2008 central government budget 
on September 26, she stressed that "economic indicators - including 
consumption of manufactured products, industrial production and the 
business climate surveys - are (flashing) green."  Meeting 
government GDP forecast would require 3.2 percent (working-day 
corrected; seasonally adjusted; annualized) GDP growth in Q-3 and 
Q-4, considerably above the respective estimates of 2.8 percent and 
2.0 percent. 
 
¶9. (U) In response to Embassy probing INSEE officials indicated that 
a higher-than-expected increase in industrial production (thanks to 
orders in the automobile sector) could boost GDP growth by 0.1 
percent and bring French growth closer to the government's target. 
However, INSEE Chief Economist Eric Dubois indicated that "the 
probability of such increase is lower than 50 percent." 
 
Comment 
------- 
¶10. (SBU) The modest pace of GDP growth will complicate GOF efforts 
to reduce the budget deficit in 2007 (septel).  However, while the 
tax package passed in July will aggravate the 2007 budget deficit, 
it may have a positive impact on economic growth in 2008 and 2009. 
The GOF undoubtedly sees delivery of near-term economic growth as 
important to its efforts to rally support for reform, and thus as 
justification of demand-side fiscal stimulus to help achieve the 
longer-term supply side measures the French economy requires. 
 
STAPLETON#