FRENCH GDP GROWTH SLUGGISH AT TWO PERCENT IN 2006

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#