FRENCH OFFICIALS OPTIMISTIC ABOUT GDP GROWTH AND

UNCLAS SECTION 01 OF 02 PARIS 002166 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 OFFICIALS OPTIMISTIC ABOUT GDP GROWTH AND BUDGET DEFICIT Refs: (A) PARIS 929 (B) PARIS 2046 ¶1. SUMMARY. Higher-than-expected GDP growth and a lower- than-expected 2005 budget deficit prompted optimistic messages on economic growth and employment for 2006. Finance Minister Breton forecast 2006 GDP would grow 2.0- 2.5%, and the unemployment rate would fall to 9% by the end of 2006, dropping to 8.7-8.8% by April 2007. Demonstrating students and unions are unlikely to be convinced. END SUMMARY Upward Revision of Q-4 2005 GDP -------------- ¶2. The National Statistical Agency, INSEE, revised upward Q- 4 2005 GDP (seasonally and work-day adjusted) to 1.6% (annualized) from 0.8% (ref A). The agency also confirmed relatively strong 2.8% GDP growth in Q-3, and revised upward Q-2 GDP growth to 0.4% (annualized) from 0%. ¶3. Interestingly, corporate investment growth, which is viewed by many economists as insufficient (ref B),was stronger than expected in Q-4, and revised to 4.8% (annualized) from 4.0%. Government investment growth was also higher, and revised to 2.0% (annualized) from 0%. ¶4. INSEE confirmed strong 2.8% (annualized) growth in household consumption in Q-3, but revised its Q-4 estimate downward to 2.4% (annualized) from 2.8%. The impact of street protests in November on consumer confidence may have been higher than expected. The March 2006 household confidence survey showed a slight deterioration compared to February, notably due to fears about unemployment. Some economists pointed out that protests against the employment contract for the youth ("Contrat Premier Embauche - CPE") might have renewed fears about growing unemployment. That said, household confidence remained at fairly high levels compared to Q-3 and Q-4 2005. Unemployment Decrease in February, but the Unemployment Rate Remained Unchanged -------------- -------------- ¶5. Unemployment decreased 15,000 in February, but that was not enough to affect the unemployment rate, which remained unchanged at 9.6% and the youth unemployment rate at 22.2%. The slight decrease in numbers was probably due to demographics and seasonal corrections, although in part it may have been due to potential job seekers choosing instead to march through the streets in protest. Interestingly, hiring through government-subsidized contracts was lower in February (14,500) than in January (30,000). Job creation remained low in 2005 based on INSEE's data released on March 31, 2005. On a year-over-year basis, employment excluding farm and government sectors increased 0.3% in Q-4 2005 over Q-4 2004. Finance Minister Remains Optimistic About 2006 -------------- - ¶6. Even with the INSEE revisions, overall 2005 GDP growth remained unchanged at 1.4%, below the government's 1.5-2.0% forecast range for 2005. Nevertheless, in his March 31 quarterly conference, Finance Minister Thierry Breton reaffirmed his 2006 GDP growth forecast of 2.0-2.5%, which should reduce the unemployment rate to 9% by the end of 2006 and to 8.7-8.8% by April 2007. He expected 200,000 jobs to be created. ¶7. The 2.0-2.5% growth GDP forecast is also the range upon which the GOF based its 2006 budget. Breton said that a return to stronger growth would enable France to reduce the budget deficit to 2.8% of GDP in 2006. On March 31, INSEE reported that the budget deficit decreased to 2.9% of GDP in 2005 (Breton said "exactly to 2.87% of GDP") from 3.7% in 2004, bringing the deficit back below the EU limit of 3% of GDP for the first time since 2001. In a separate interview with Le Monde, Breton said that public debt, which had increased to 66.8% of GDP in 2005 from 64.4% in 2004, would stabilize in 2006. Speaking for European Commissioner to Economic Affairs Joaquin Almunia, Amelia Torres indicated that the Commission would continue to keep a close eye on the French deficit, since the public debt was worrying. PARIS 00002166 002 OF 002 Comment -------------- ¶8. Breton delivered his message of optimism at a time when the government is confronted with unrest over measures to reduce unemployment. He did not say whether his forecast for a decrease in unemployment took into account any jobs created by the CPE. His optimism therefore is unlikely to calm and convince the hundreds of thousands students and unions protesters demanding the complete withdrawal of the law on the CPE. STAPELTON