By Jana Mlcochova
PRAGUE Jan 31 Czech finance ministry slashed its growth outlook for this year to almost zero on Thursday after poor economic data showed the year-and-half old economic downturn deepened.
The ministry now expects the economy to eke out just 0.1 percent growth in 2013, down from 0.7 percent seen in its October forecast.
"The Czech economy was probably going through a shallow recession in 2012. It could emerge from (the recession) in the beginning of this year although a revival of economic activity should be very gradual," the ministry said.
A series of tax hikes and budget cuts by the centre-right administration of Petr Necas hit household consumption while falling demand for Czech industrial products from the euro zone prompted companies to lay off people, curb wage increases, and cut investment.
Falling industrial output, the main driver of Czech growth, and purchasing managers indexes on the manufacturing sector have shown companies suffered from falling new orders.
Contracting retail sales, decelerating inflation and rising bank deposits have underscored defensive consumers.
The Czech economy has not grown since the middle of 2011 while the central bank cut borrowing costs to zero to prop up demand and said it would weaken the crown if it needs to ease policy further, to avert expectations for price falls and push people to spend.
The ministry expects household demand to contract by 0.7 percent this year, deeper than the 0.5 percent fall seen in October, and it sees the contribution of net exports to growth at 0.7 percentage points, down from 1.0 points seen in the autumn.
"The forecast seems slightly pessimistic... however, I agree with the view that the state budget will be tight this year and demands caution," said Pavel Sobisek, chief economist at UniCredit Bank.
Regional peer Poland saw its growth fall to its weakest in three years in 2012 and is still slowing, adding to signs that one of Europe's most resilient economies risks dipping into recession.
However, latest data from Germany, the Czech Republic's main trading partner, including the business climate index Ifo and PMI showed business morale and activity has improved.
Czech Central Bank Deputy Governor Vladimir Tomsik told Reuters in an interview earlier this week the outlook for growth abroad has not worsened since the bank's November forecast, which was a good signal.