GDP INCREASED 2.3 PERCENT IN 2004; UNEMPLOYMENT

UNCLAS SECTION 01 OF 02 PARIS 001050

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 PBIO
SUBJECT: GDP INCREASED 2.3 PERCENT IN 2004; UNEMPLOYMENT
REMAINED HIGH



1. SUMMARY. According to the latest flash estimate, French
GDP increased a relatively high 2.8 percent (annualized) in
the fourth quarter of 2004, which means France posted a
decent 2.3 percent growth rate for 2004. Domestic demand
revived, contributing to significant import growth. France
posted a small foreign trade deficit as exports increased
less than imports. Despite 2.3 percent GDP growth, the
unemployment rate remained stubbornly stuck at 9.9 percent.
In response, the GOF announced measures to boost economic
growth and reduce significantly unemployment in 2005, to be
reported septel. END SUMMARY.

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GDP increased 2.3 percent in 2004
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2. Based on a National Institute for Statistical and
Economic Studies (INSEE) flash estimate, economic growth
recovered in Q-4 as GDP increased 2.8 percent (annualized),
after stagnating in Q-3. Including an upward revision in
both Q-1 and Q-2 GDP to 2.8 percent from 2.4 percent, full-
year growth came in 2.3 percent, despite the Q-3 break, or
2.5 percent non-adjusted for worked days. The 2004
performance, which is far better the 0.5 percent growth in
2003, came in above the expected 2.2 percent growth, but
remained below the 2.5 percent GOF forecast. Finance
Minister Gaymard rounded 2004 GDP growth to "about 2.4
percent" in his February 8 speech on the GOF economic policy
in the next 30 months.

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Domestic demand was the Main driver
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3. Gaymard credited the strength in growth rates to a Q-4
boom in consumer spending. The Finance Minister said that
consumer spending growth accelerated to 2.2 percent from 1.6
percent in 2003 despite the correction that stalled the
economy in Q-3. Price discounts and various temporary tax
breaks (cutting inheritance and gift taxes, and permitting
early withdrawal from corporate savings accounts) helped
boost spending in Q-4. More than 2 million people withdrew
5.6 billion euros from employee-savings. The inheritance
incentive resulted in the transfer of 5.4 billion euros
between June and December. Housing investment accelerated
in France, increasing 3.7 percent.


4. The long-awaited recovery in corporate investment
finally took place in 2004. Corporate investment rebounded
2.9 percent (excluding inflation),after decreasing 1.6
percent in 2003.

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Exports Rebounded, but Increased Less than Imports
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5. The French trade balance (Fob/Fob - Customs basis)
registered a 7.8 billion euro deficit (0.4 percent of GDP)
in 2004 compared with a 1.7 billion euro surplus in 2003.
Exports increased (5.6 percent) less than imports (8.6
percent). Companies argued the strength of the euro made
export business difficult. The sharp increase in imports
was mainly due to a rise in domestic demand and imported
commodity prices, notably oil prices.


6. Gaymard confirmed that the rise in imports reflected
strong domestic demand. Foreign Trade Minister Francois
Loos underlined that "both exports and imports reached
record highs, the result of strong internationalization of
the French economy." Answering implicitly commentators who
said that French exports lost competitiveness since world
trade increased 12 percent in 2004, Loos stressed "there was
no competitiveness problem since the French foreign trade
excluding the energy deficit (28.9 billion euros) posted a
surplus."


7. On a geographical (CIF/FOB) basis, France posted a
deficit with the euro zone (6.6 billion euros) in 2004,
notably a significant trade deficit with Germany, its major
trading partner (11.5 billion euros). France had a surplus
with the 15 EU members (1.6 billion euros),and the 25 EU
members (3.2 billion euros). With the U.S., France posted a
1.1 billion euro surplus.

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Despite Oil Prices, Inflation was Moderate
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7. In December, the year-over-year consumer price increase
was moderate (2.1 percent),notably because oil prices
dropped to USD 43.45 a barrel at year's end from a record
high of USD 55.17 on October 22. The increase in consumer
prices excluding oil prices was 1.5 percent, probably
reflecting the on-going impact of the Government "arm-
twisting" on distributors to cut retail prices. Price
increases in the services sector were less moderate (2.6
percent).

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Weakness: Unemployment Rate Stuck at Around 10 percent
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8. The unemployment rate remained high at 9.9 percent in
December, twice the unemployment in some other European
countries as the French economy only created 40,000 jobs in

2004. The GOF pledges to steer joblessness below 9 percent
in 2005 by reducing the number of unemployed by 10 percent
through the net creation of 200,000 to 300,000 jobs.

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GDP Growth Could Be Lower than 2.5 percent in 2005
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9. Q-4 GDP growth was better-than-expected. Many private-
sector economists had forecast 2.4 percent (annualized). In
January, economists forecast 2005 GDP growth to slow to 1.8
percent, below a potential trend of 2.25 percent, notably
fearing a renewed weakness in consumption in early 2005 due
to high unemployment that contributes to household pessimism
and amplifies the vicious circle of lower demand and fewer
job creation. Recently, the Bank of France forecast GDP to
increase 2.0 percent (annualized) in Q-1 2005, taking into
account recent INSEE's estimate of Q-4 GDP growth, and
indications provided by its business climate indices for
January.

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Comments: Achieving 2.5 percent GDP Growth in 2005 Remains
Unsure
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10. France's 2004 GDP performance was no so bad, as GDP
growth outpaced other large euro zone countries, notably
Germany. That said, the GOF is aware that achieving its 2.5
percent GDP growth objective in 2005 and reducing
significantly unemployment will be hard to achieve without
further measures and reforms. In his February 8 speech,
Gaymard announced a series of measures to boost economic
growth and eliminate the vicious lack-of-confidence circle
by stimulating consumer spending, the purchasing power and
activity of companies, and thus job creation. The GOF
policy will be reported septel.
LEACH