By Jana Mlcochova

PRAGUE, Oct 29 (Reuters) - The Czech economy should grow by 0.3 percent in 2010, the finance ministry said on Thursday, leaving its forecast unchanged from July, despite the approval of a government austerity package.

The forecast, updated every three months, cut expectations for this year's growth to a 5 percent contraction, from a previously seen 4.3 percent shrinkage.

It had earlier said the 67.3 billion crown ($3.74 billion) belt-tightening package -- which hikes indirect taxes and cuts

some social fees -- would cut 0.8 percentage points from predicted growth next year.

That would have meant shrinkage of 0.5 percent, taking into account the ministry's previous 0.3 percent growth forecast.

But it said 'new facts' tied to the external environment, inflation, and the labour market, showed the 0.3 percent growth forecast could remain unchanged despite the negative effect the package would have.

However, structure of growth would be 'significantly' different compared with the previous outlook, with the main factor being an improvement in the trade balance due to an improving growth outlook for the global economy.

'The dominant element will be the foreign trade contribution, mainly due to a recovery in partner countries on the side of exports, and restrictions coming from the package for domestic demand on the side of imports,' the ministry said.

Politicians grudgingly supported the technocrat government's austerity package, which caps the 2010 central state budget gap at 162.7 billion crowns, below an originally planned record 230 billion, meaning an overall public sector gap of 5.3 percent.

That will keep Czech bond issuance in 2010 will near this year's elevated levels. Also on Thursday, Finance Minister Eduard Janota said the ministry would issue 260 billion to 300 billion crowns ($16.66 billion) in debt.

'Approximately 160 billion (crowns in borrowing is needed) for the budget deficit and at least 100 million on principal payments of old debt,' Janota said in an interview released on the Finance Ministry's Web site.

'I estimate the issuance of bonds between 260 and 300 billion crowns.'

RATES, OUTLOOK

The central bank will release main points of its new quarterly outlook next Thursday when it meets on rates. Its August forecast sees 2010 growth at 0.7 percent.

The economy shrank by 5.5 percent year on year in the second quarter, the deepest drop on record. Inflation was at zero in September and the central bank said it could briefly drop below zero in October.

Most analysts expect the bank to stay put at a monetary policy meeting next Thursday despite remarks by Governor Zdenek Tuma and Vice-Governor Miroslav Singer pointing to more easing, including using non-standard easing tools.

Czech central bank board member Robert Holman said last week the austerity package was a downside risk to the bank's inflation outlook due to its expected demand-shrinking effects.

Inflation has remained subdued in times of a severe economic downturn allowing for Czech borrowing costs to sink to a record low of 1.25 percent.

Tuma has warned of a protracted deflation if the crown currency kept firming but the unit has fallen 4 percent since his comments, putting less restriction on price growth.

The ministry cut outlook for the 2009 annual consumer inflation rate to 0.9 percent from 1.1 percent and upped the 2010 forecast to 1.4 percent from 1.1 percent, far below the central bank's 2010 target of 2 percent plus or minus 1 percentage point.

It said 2009 overall public sector gap would be 6.6 percent of gross domestic product. It said it would not be able to bring the shortfall to the euro zone-prescribed 3 percent threshold by 2013, as required by EU authorities.

(Reporting by Jana Mlcochova; Editing by Andy Bruce) ($1=18.01 Czech Crown) Keywords: CZECH ECONOMY/FORECAST

(prague.newsroom@thomsonreuters.com; Reuters Messaging: jana.mlcochova.reuters.com@reuters.net; +420-224 190 479)

COPYRIGHT

Copyright Thomson Reuters 2009. All rights reserved.

The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.