UPDATE 1-Shrinking Dutch economy in worse shape than thought

Mon Dec 10, 2012 9:29am EST

Related Topics

* GDP -0.6 pct in 2013, vs +0.6 pct seen previously - cbank

* Govt deficit -3.5 pct in 2013 vs -2.9 pct previously -cbank

* More budget cuts may be required - cbank

* Risk of Dutch credit downgrade has increased - Rabobank

By Gilbert Kreijger

AMSTERDAM, Dec 10 (Reuters) - The Dutch economy is in worse condition than originally believed and will continue to shrink next year, heightening the risk of a downgrade of the Netherlands' triple-A credit rating.

In its semi-annual report on Monday, the Dutch central bank highlighted the fragile state of the euro zone's fifth-largest economy, cutting its growth forecast and projecting the budget deficit to exceed the European Union's 3 percent limit in 2013.

The central bank's forecasts pose a challenge to Prime Minister Mark Rutte and his new coalition government, which is imposing nearly 30 billion euros ($39 billion) of austerity measures agreed earlier this year.

The bank said the deficit is expected to fall to 3.5 percent of gross domestic product next year from 4.1 percent this year. This was an increase from previous forecasts of 2.9 percent, however.

Similarly, it chopped its forecast for economic growth in 2013 to -0.6 percent from +0.6 percent. Growth is expected to resume in 2014, with an expansion of 1 percent, it said, although again this was a cut in forecast from 1.2 percent.

Rabobank said the poor growth prospects increased the risk of a downgrade for the Netherlands from its top rating. That could hamper Europe's efforts to solve its debt crisis, which has thrown the euro zone into recession and hit investor sentiment globally.

Rating agency Moody's has already warned of potential downgrades for the triple-A rated Netherlands -- citing the weak economy and high mortgage debt -- as well as for Germany and Luxembourg.

Moody's stripped France of the top rating last month, following Standard & Poor's downgrade in January, citing an uncertain fiscal outlook and a deteriorating economy. Even so, borrowing costs for France have remained low.

"(The central bank) growth forecasts are quite far below those of Moody's and S&P. If these rating agencies were to subsequently revise their own GDP growth forecasts to more closely reflect those of the central bank, this would weigh on their rating assessments of the Dutch sovereign," Rabobank economist Lyn Graham-Taylor said.

MORE BUDGET CUTS POSSIBLE

Although part of the core, the Netherlands is suffering from a drop in house prices, a building slump, falling consumer spending and investments, government austerity measures, lower exports, and the euro zone debt crisis.

It contracted 1.1 percent in the third quarter compared with the preceding period, worse than the economies of Spain, Portugal, and Italy in that period, Eurostat data showed last month, while unemployment has risen to a 15-year high.

If the downward trend continues, it may be necessary to make more spending cuts or bring them forward, central bank executive board member Job Swank told broadcaster NOS and RTL 7

The Finance Ministry said in a statement that the government will stick to current budget rules, which require new spending cuts if the deficit is one percent bigger than originally forecast.

The Liberal-Labour coalition government has fallen in popularity since announcing a 16 billion euro austerity package in October. Both the populist Freedom Party, led by anti-Islam politician Geert Wilders, and the far-left Socialist Party have made gains.

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