The Czech economy should contract by 1% this year as a result of falling domestic consumption and ongoing fiscal consolidation, the Organisation for Economic Cooperation and Development (OECD) said in its latest Economic Outlook published on May 29, 2013 cutting down its forecast from an earlier expected GDP growth of 0.8%.

The OECD expects the Czech economy to pick up from mid-2003 onwards as exports recover from the negative impact of the euro crisis and improving business and consumer confidence support domestic demand. In 2014 the economy should return to a growth of 1.3%, slightly down from an earlier estimate of 1.8%. Higher industrial output and rising bank lending to the non-financial sector will also support GDP recovery next year.

The organisation sees the Czech public finance deficit narrowing to 3.3% of economic output in 2013 from 4.4% in 2012 but above the government’s target of 2.8%. In 2014 the gap should be trimmed to 3% of GDP, the OECD said adding that fiscal consolidation will likely need to resume to curb the deficit and the growing public sector debt.

After picking up at the beginning of the year due to a rise in the sales tax and regulated price hikes, inflation eased in the following months and is projected to fall to the lower half of the central bank’s tolerance band of 1-3%. With rates close to zero, the central bank should consider ways to further ease the monetary policy to stimulate activity, the OECD said.