ANNEX TO ECONOMIC INTELLIGENCE WEEKLY: THE FRENCH ECONOMY UNDER PRESIDENT GISCARD

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001500170010-3
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: November 16, 2016
• Document Release Date: January 7, 2000
• Sequence Number: 10
• Publication Date: May 22, 1974
• Content Type: REPORT

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Confidential
No Foreign Dissem
Annex to
Economic Intelligence Weekly
The French Economy Under President Giscard
Confidential
CIA No. 8035/74/A
22 May 1974
Copy N2 242
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Confidential
No Foreign Dissem
THE FRENCH ECONOMY UNDER PRESIDENT GISCARD
1. The elevation of Finance Minister Giscard d'Estaing to the presidency
probably will not have a pronounced effect on the French economy or government
economic policy. The short-term outlook is for continued moderate growth, rapid
inflation, stable employment, and a manageable trade deficit. Production will
continue to be constrained more by inadequate capacity than by deficient demand.
These prospects could be upset before yearend by serious labor troubles, since
the unions oppose Giscard's conservative economic policies.
2. As the chief architect of recent French economic policy, Giscard is
unlikely to institute any more changes than he feels he has to. Because his victory
was so narrow, lie is apt to lean a little more toward expansionary policies at
the expense of the anti-inflation campaign. An advocate of the free market, lie
will continue to resist adding a wage-price freeze to the present policy mix of
tight credit restraints and flexible price controls. At the same time, his slim victory
margin will reduce his ability to withstand demands for inflationary wage increases.
To forestall labor unrest, Giscard is likely to move quickly in making good on
campaign promises of reforms benefiting pensioners, the unemployed, and low-paid
workers.
3. In international negotiations, Giscard's pragmatic approach should be
more to Washington's liking than the dogmatic posture sometimes assumed by his
Gaullist predecessors. Giscard reportedly opposed the Pompidou government's
obstinate stand at the Washington Energy Conference as well as the bilateral deals
with Arab oil producers. His friendship with new German Cliattcullor Helmut
Schmidt may also augur well for improved relations within the Community. In
view of widespread popular support for Gaullist foreign policies, however, Giscard
is unlikely to stray far from the independent, nationalist stance of the past. In
particular, he can be expected to overrule foreign objections to steps deemed
essential to eliminating the French trade deficit by 1976.
4. As expected, the French economy has suffered less than most
industrialized nations from the oil crisis. The growth rate through April dipped
from last year's exceptional 6% but still proceeded at an enviable clip - perhaps
3% or so. The major components of total demand have remained strong: investment
and government spending are high, consumer purchases are up except in the hard-hit
automobile market, and exports are booming. Businessmen and consumers complain
about tight credit but manage to go on spending. Many consumers appear to be
buying now because they fear higher prices in the future.
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5. According to the official index, industrial production continued to
stagnate in the first quarter. Many firms reported order backlogs because of lack
of' production equipment, while some were plagued by labor and raw material
shortages. Capital goods output, which is not adequately reflected in the official
index, has grown considerably since December. Consumer goods production has
dipped slightly, mainly because of sharply reduced demand for automobiles.
Construction activity, which had dropped substantially in January, rebounded in
February to a level 8% above the 1974 average.
6. A 35% gain in exports held the first-quarter trade deficit to $700 million,
compared with a $300 million surplus in the same period last year. Imports jumped
by nearly 50% even though the 1 January oil price hike was not fully felt until
late in the quarter. Higher prices for raw materials and a larger volume of' finished
goods imports contributed to the rise in import value. April brought a sobering
trade deficit of $400 million as imports exceeded the year-earlier level by a
remarkable 72%. Export earnings grew by 38%, buoyed by heavy demand for
French agricultural products and semi-finished goods. Depreciation of the franc
bolstered the competitive positions of French goods in foreign markets.
7. The news along the inflationary front has been mostly bad. Consumer
prices in the first quarter shot up at an annual rate of 18% from their end-of-1973
level. Retail prices for finished industrial goods rose at an annual rate of about
27%; the industrial wholesale price index, which covers mainly semi-finished goods,
soared at a 72% rate. Prices of imported raw materials took another jump, rising
at an annual rate of close to 100%. The only bright spot in the picture was
agricultural wholesale prices, which declined slightly. With hourly wages tit) during
the first quarter at an estimated 20% annual rate, further large prire increases are
assured.
Prospects During Giscard's First Few Months
8. Like most leaders in the industrialized world, Giscard at times will find
it politically difficult to make rational economic choices in the months ahead.
His latest growth forecast for 1974 as a whole is 3.8% -- France's poorest
performance since 1959. Even with slow growth, the control of inflation may prove
to be especially difficult, particularly if wage demands escalate. Giscard's strategy
calls for reversing recent inflationary trends by mid-summer, then easing policy
to stimulate growth. He apparently intends to loosen credit limits and fiscal
constraints at that point. Should the growt'i rate sho,v signs of dropping much
below 4%, Giscard probably also would - reluctantly - cut value-added taxes.
Reasonably Strong Growth Factors
9. Most industries have enough orders to ensure a reasonably high level of
activity until fall. Chemicals and basic metals look particularly strong, capacity
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being the chief obstacle to expanding output. Production of electrical equipment
should continue to grow rapidly, as should the output of most other capital goods
except transport equipment. Consumer-goods manufacturers foresee generally
moderate gains, including some comeback by the automobile industry.
10. Consumer demand will be the big question mark in the months ahead.
Its first-quarter behavior was erratic; an unexpected surge during the first two
months was followed by a decline in March and a recovery in April. Buyers have
the means to increase their spending: real wages are up 5% from year-earlier levels
and liquid savings are at a record high. The government is seeking to hold down
consumer buying by restricting credit and limiting wage gains, partly in an effort
to free goods for export. But the decisive factor will be the attitudes of consumers
themselves. If inflation remains their prime concern, heavy buying to beat price
rises is likely. If recession and unemployment become more threatening, consumers
may increase savings as a precautionary measure. On balance, it appears that the
volume of consumer purchases in the next few months will be some 3% to 4%
above year-earlier levels.
11. The other components of demand also point to moderate growth.
Government spending - making tip about one-fifth of GNP -- is budgeted to
increase by 13% in nominal terms. The current outlook for private investment
is for a 5% increase over last year's volume, rather than the 8% forecast a few
months ago. New measures to boost export-related investments, expected in July,
could raise this forecast. Aided by the depreciation of the franc since it was floated
in January, exports should continue well above 1973 levels, assuming that recession
and import restrictions do not seriously weaken foreign demand for French goods.
Continuing Tug of War Between Prices and Wages
12. Even if the worst st,rge of inflation is now past, continuing substantial
increases in prices are likely. Higher costs for labor and raw materials will exert
upward pressure throughout the year. The government's goal of holding real wages
constant during the remainder of the year is almost certainly unrealistic, given
the mood of French labor. The most likely prospect is that money wages will
continue to rise through the summer at an annual rate of about 20%, further
boosting unit labor costs. Even if consumer prices thereafter return to their late
1973 pattern, rising about 1% monthly, the inflation rate for 1974 would average
about 14%.
13. Unemployment and increasing labor militancy - not pressing problems
yet - could become serious in a few months. The number of unemployed has
held steady at about 425,000 - 2.0% of the labor force -- mainly because most
firms faced with production cutbacks have reduced working hours rather than
employment rolls. Unemployment should move upward this summer as school
graduates enter the labor force, possibly reaching 500,000 later in the year.
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14. because Giscard is anathema to the unions, which are generally far to
the left in the political spectrum, his election could provoke a serious clash with
labor. With real growth reduced and 21/0 of GNP being absorbed by the rise in
the oil import bill, labor's demands cannot easily be satisfied. A clash, however,
is not likely to cone before fall. As a tactical maneuver, the unions probably
will first give Giscard a chance to show his ]land.
A Large But Manageable Current Accuune Deficit
15. The trade deficit is expected to worsen in coming months. Conservation
measures notwithstanding, higher oil prices will add about $400 million monthly
to the import bill. The stimulative effect of depreciation on French exports will
be largely offset by slow economic growth in other industrialized countries. A
deficit of $4 billion is now in prospect for 1974, compared with the 1973 surplus
of $1.4 billion. The current account deficit prcbably will reach $6 billion, since
France's surplus in the services account will, as usual, be more than offset by
government transfers and workers' remittances.
16. Despite the sharp deterioration in its current account, Paris is intent on
preserving its foreign reserves at about their current level. It apparently will have
little trouble doing so. Unlike Italy and some other heavy borrowers, France retains
a sound credit rating in private capital markets. Paris already has lined up some
$3 billion in the Eurocurrency market and almost certainly can obtain more if
it wishes. To limit debt service payments, however, Paris will continue to enlarge
its export promotion program. To this end, it already has provided financing for
investment in export industries, expanded its export insurance guarantees, and
increased its effort to induce oil-rich countries to buy French goods.
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FRANCE: DOMESTIC ECONOMIC INDICATORS
100 Annual Growth note (Percent)
150 7.2 7.3
~ 1 '
An ". 1 1 7~~. x..
10o LU _Ll U I-1J_1_l1_1J I 1 LLLLLLLJJ
1972 1973 1974
'Seasonally Adjusted
"Increase over comparable period of 1973,
100
150
140
Annual Growth Rate (Percent)
13.2
1968.73 1973 Jan
Average 1974**
100 LIII1l111 1111111111111
1972 1973 1974
'Seasonally Adjusted
"Increase over comparable period of 1973.
100
150
140
130
120
110
PRICES
Annual Growth Rota (Percent)
0.2 5,9
~.i Y'
Industrid 30.2
4Vhulnsalc
7.4
Consumer
100 L_L11__1J._1_L_1_.l_~__l_L1.1_~_I__L__L_I_I1 JJ
1972 1973 1974
'Increase over comparable period of 1973.
MONEY MARKET RATES
Interest Rate for Call Money
Jan Jan Jan
1970 1971 1972
Note: End of Period
Apr Jul Oct Jan Apr
1973 1974
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FRANCE: EXTERNAL ECONOMIC INDICATORS
VALUE OF TRADE
5 r
EMpUriS I.O.b.
IIII ~IOfI.i 1.0.11.
0f 1 1 I I I I -1-1 111
1970 71 72 73 I 11 III IV J F MA
1973 1974
TRADE BALANCE
f.o.b./f.o.b.
$0,2
Average 1072 73 73
Seasonally Adjusted
1970 71 72
Note: End of Period.
Mar
74
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FRANCE: EXTERNAL ECONOMIC INDICATORS
TERMS OF TRADE
125 r- National Currency
EXPORT PRICES IN US $
EXCHO.NGE RATES FOR THE FRANC
Percent Change from 18 Dec 71
Against 16 Currencies (Trade-weighted ava,age)
1
1972
L1 L__ I Li I I I I I
IV I II III OctNovUecJan FebMarApr 17
1973 1974 May
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