PRAGUE–The euro zone’s poor economic health remains the main downside risk to the Czech economy, the country’s finance ministry said Thursday revising down its domestic growth forecasts for 2013 and 2014.
“Besides uncertainty about further developments in the euro zone, low domestic self-confidence levels among local consumers and businesses also pose a risk for the Czech economy,” the ministry said in its latest quarterly economic forecasts.
The ministry now expects Czech gross domestic product to contract 1.5% in 2013, compared with stagnation expected in a forecast released in April.
“Although we still expect a gradual recovery in the second half of this year, on average GDP will contract on the year in 2013, largely because of a steep contraction in the first quarter,” the ministry said.
In the three months to end-March, the Czech economy contracted 1.3% quarterly, marking its sixth consecutive quarter-on-quarter decline, extending the country’s already longest recession since the late 1990s.
The ministry also scaled back expectations of economic growth next year to 0.8% from 1.4% in the previous report.
The Czech economic contraction has been driven by falling domestic demand, government fiscal austerity measures–putting pressure on real wages and disposable incomes–and waning demand for Czech exports, centered on cars and electronics, in Western Europe. Euro-area countries, still recovering from their credit crisis, represent the largest market for Czech exporters.
However, the ministry expects some pick up in government expenditures, a 0.5% increase in spending in 2013, compared with forecasts for a 0.2% contraction its previous prediction. Although the ministry still expects the government to cut back its expenditures next year, it now sees a milder drop of 0.9%, compared with a 1.7% in its earlier forecast.
At the price of choking economic growth, the Czech government’s spending cuts have made it one of the least financially overextended governments in the European Union. The Czech fiscal debt is currently running at 40% of GDP, well below 90% in many EU countries, and the government’s fiscal deficit is currently below the EU limit for 3% of GDP.
Looking at inflation, the ministry now forecasts consumer prices to rise 1.6% annually this year and 1.4% in 2014, compared with 2.1% and 1.7%, respectively, see in its previous forecast.
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