OECD: Czech Republic faces mild recession and high inflation this year

The Czech Republic is expected to face a mild recession this year, with a gross domestic product (GDP) decline of 0.1 percent. A recovery is expected next year, with the economy growing by 2.4 percent, according to a report by the Organization for Economic Cooperation and Development (OECD), presented on Thursday by Prime Minister Petr Fiala (ODS) and OECD Secretary-General Mathias Cormann at a press conference in Prague. The report also recommends budget consolidation for the Czech Republic. Fiala’s government aims to reduce the structural deficit by one percent of GDP annually, or about 70 billion Czech crowns.

The OECD predicts economic recovery next year, with GDP growing by 2.4 percent and inflation dropping to 4.2 percent. The organization recommends maintaining a tight monetary policy to combat rising prices until inflation clearly points towards two percent.

At the same time, the organization notes the need for government support measures to be targeted rather than a blanket; otherwise, the cabinet would contribute to inflation. The report states that the relaxed macroeconomic policies of 2020 and 2021 have contributed to high inflation.

The report also highlights high deficits in public finances in recent years. According to the OECD, the Czech Republic should strengthen tax progression or increase the retirement age for medium-term fiscal sustainability. The organization also recommends changing the distribution of tax burden, with mandatory contributions reduced and property, consumption, or environmental taxes increased.

According to Fiala, the OECD accurately identified the challenges facing the Czech Republic, and the proposed measures align with the government’s efforts. “I am pleased that this significant and independent organization confirms the need to take reform steps, which may not always be pleasant and may be perceived as painful by some segments of society, but which are necessary for the good future of our country,” said Fiala.

Reducing by one percent of GDP annually

He added that the cabinet is working on consolidating public finances, aiming to reduce the structural deficit by one percent of GDP. Last year, the structural deficit, or the result of government performance after removing the impact of the business cycle, was 2.6 percent of GDP, according to the Ministry of Finance. The total budget deficit of 360.4 billion Czech crowns represented 3.6 percent of the GDP.

According to Fiala, the government is also working on pension reform to ensure decent pensions for those in their forties and younger. At the same time, changes will not affect those in the immediate pre-retirement age, emphasized the prime minister.