OECD revises its predictions for GDP

Unemployment rates remain the biggest problem facing world economies coming out of the crisis, according to the most recent report from the Organization for Economic Cooperation and Development (OECD), released May 25.

In the Czech Republic, the organization's forecast for GDP growth this year was downgraded to 2.4 percent, down from the 2.8 percent growth it predicted in its November report. But next year's GDP forecast rose to 3.5 percent, up from 3.2 percent.

"Despite ongoing fiscal tightening, real GDP growth is expected to reach 2.4 percent this year, driven primarily by strong foreign demand," the report said. "Growth will broaden and rise further to 3.5 percent in 2012, as consumption picks up."

Private consumption is expected to grow 2.6 percent in 2012, up from 0.4 percent and 0.5 percent in 2010 and 2011, respectively. Government consumption will grow 1.3 percent in 2012, up from a 1.2 percent contraction this year and 0.3 percent growth in 2010, according to OECD forecasts.

The organization also said indirect tax increases will cause a spike in headline inflation, referring to a planned adjustment to the VAT rate. The Cabinet approved draft legislation May 25 to raise the lower VAT rate from 10 percent to 14 percent as of Jan. 1, 2012, and leave the upper rate at 20 percent. In 2013, both rates will be unified at 17.5 percent.

The report advises the government to take advantage of economic recovery in order to put through not only pension, but healthcare reforms.

"The authorities should continue with fiscal tightening to achieve medium-term targets and use the upswing of the economy as an opportunity to secure the long-term sustainability of pension and healthcare systems," the report said.

The OECD also updated forecasts for the neighboring economies of Poland and Hungary, which are forecast to have GDP growth this year of 4 percent and 2.7 percent, respectively.

Poland's economy is expected to get a boost from infrastructure projects financed by the EU and preparations for the Euro 2012 soccer championships.

Worldwide, the OECD forecasts GDP growth to hit 4.2 percent this year and 4.6 percent in 2012. Within the OECD member countries, forecasts for the same years are at 2.3 percent and 2.8 percent.

Countries must work on labor market policies in order to boost jobs and address one of the crisis' lingering effects - unemployment - so that it does not become a longer-term problem.

"This is a delicate moment for the global economy, and the crisis is not over until our economies are creating enough jobs again," said OECD Secretary-General Angel Gurría. "There is also some concern that if downside risks reinforce each other, their cumulative impact could weaken the recovery significantly, possibly triggering stagflation in some advanced economies."

Claire Compton can be reached at
ccompton@praguepost.com