The Czech economy should contract by 1.5% this year as domestic demand continues to fall amid the weak labour market, low confidence and fiscal consolidation, the Organisation for Economic Cooperation and Development (OECD) said in its latest Economic Outlook published on November 19, 2013 worsening its forecast from an earlier expected GDP drop of 1%.
Growth is expected to gather pace next year as fiscal consolidation will make a pause and demand from abroad strengthens, the OECD said noting that the recovery will be sufficiently stronger to gradually narrow the output gap despite the fact that unemployment will decrease only slightly due to an unwinding of labour hoarding.

In 2014 the economy should return to a growth of 1.1%, weaker than an earlier estimate of 1.3% announced in May. Risks to the forecast are mostly external as recovery depends on developments in the eurozone, the Czech Republic’s main export market. In case downside risks in this area materialise, export growth would stall damaging confidence and the recovery. On a positive side, a stronger-than-forecast domestic confidence could trigger more investments and job creation.
The Czech government expects the GDP to shrink by 1% and the central bank sees a 0.9% drop in 2013.
The OECD sees the Czech public finance deficit narrowing to 2.9% of economic output in 2013, in line with the government target.
The weak economy and falling fuel and utility prices brought inflation to below 1%, which is the lower boundary of the central bank’s tolerance band. In order to bring inflation up to its target of 2%, the central bank launched foreign exchange interventions and according to the OECD the bank should continue the interventions until inflation bounces back within the bank’s target and conventional monetary policy tools become effective again.