The government had previously forecast growth of 3.5-4.5% for this year, and the downward revision comes despite latest data showing the economy shrank less than expected in the October-December quarter as domestic activity and exports recovered after coronavirus restrictions were eased.
The vital tourism sector remains in limbo because of international travel restrictions, and a COVID-19 outbreak in December has dealt a further blow to the country's fledgling recovery.
Southeast Asia's second-largest economy shrank 4.2% in the final quarter of 2020 from a year earlier, after a 6.4% contraction in the previous three months, National Economic and Social Development Council data showed on Monday.
On a quarterly basis, the economy expanded a seasonally adjusted 1.3% in the December quarter, after a revised 6.2% expansion in the September quarter.
Economists in a Reuters poll had forecast the economy would shrink 5.4% year-on-year and grow 0.8% quarter-on-quarter.
Somprawin Manprasert, chief economist of Bank of Ayudhya, said the GDP data was not a surprise and the economy should return to pre-pandemic levels in the third quarter of 2022, slower than earlier expected.
"Having had a bad crash, the economy was hit on the back by the second wave, so it's difficult to recover," he said.
The main stock index rose 0.6% after the GDP data while the baht gained slightly to 28.83 per dollar.
In 2020, the economy contracted 6.1%, the biggest fall since 1998, during the Asian financial crisis.
Thailand had largely contained the spread of coronavirus by mid-2020 but new cases detected in December have led to infections across the country and slowed consumption and domestic travel.
The NESDC now expects exports, also a key driver of growth, to rise 5.8% this year, rather than expand 4.2%.
But it also forecasts just 3.2 million foreign tourists this year, down from an earlier forecast of 5 million arrivals.
Last year, there were only 6.7 million foreign tourists versus nearly 40 million arrivals in 2019.
"Fiscal support will be key to underpin the recovery this year as monetary easing runs its course," said DBS economist Radhika Rao.
The government has supported the economy with a 1.9 trillion baht ($63.61 billion) stimulus package, while the central bank has slashed interest rates by 75 basis points last year to a record low of 0.50%.
($1 = 29.87 baht)
By Orathai Sriring and Kitiphong Thaichareon