The Czech finance ministry cut its GDP outlook for 2013 and 2014 due to a deep slump in economic activity in the first quarter and a steeper drop in investments projected for the two years, the ministry said in a newly-released forecast on July 25.

The Czech economy, which shrank by 1.2% in 2012, should contract by 1.5% this year, according to the ministry’s new forecast, while in its previous forecast published in April it was expecting a stagnation. In 2014 the Czech economy will return to a 0.8% growth, yet smaller than April’s forecast of 1.2%. The Czech economy entered its longest recession in a decade contracting for the six straight quarter in Q1 as it is suffering from low domestic demand as businesses and households are cutting spending amid the government’s austerity measures and the eurozone’s debt crisis.

The ministry expects household consumption to drop by 0.8% in 2013 but rose by 0.4% the next year. Household consumption in 2013 and 2014 will be supported by significantly lower growth of consumer prices. However, this growth will be accompanied, particularly in 2013, by only negligible growth of nominal disposable income, the ministry said. In 2013, the negative contribution of gross domestic expenditure to GDP growth will be mitigated by the minimal positive contribution of foreign trade. According to the ministry’s estimates, real exports should decrease by 1.1% this year and imports are seen contracting by 1.4%. In 2014, GDP growth should be driven by a positive balance of foreign trade with real exports growing by 2.9% and imports by 2.4%.

The Czech budget deficit for 2013 is projected to narrow from 4.4% of GDP in 2012 to 2.8%, the ministry said keeping unchanged its target from April. Upside risks to the general government sector balance include additional income from the sale of emission allowances and the possible sale of LTE licences to mobile operators expected to bring in CZK 8-14bn. On the other hand, lower EU funds and higher flood damage costs represent downside risks.

Employment is forecast to rise by 0.5% in 2013, versus April’s estimate for a contraction of 0.2%, while unemployment should rise from 7% in 2012 to 7.5% in 2013 and to 7.6% in 2014.