UPDATE 1-Dutch economy to shrink more than forecast
* Dutch economy to shrink 4.75 pct in 2009, 0.5 pct in 2010
* Govt deficit 4.1 pct of GDP in 2009, 6.7 pct in 2010
* Recession may continue longer than expected
* Deflation is possible due to "very deep recession"
(Adds CPB comment, background)
THE HAGUE, June 16 (Reuters) - The Dutch economy is expected to contract 4.75 percent this year, more than previously expected, due to a slump in world trade and less consumer spending, Dutch government think tank CPB said on Tuesday.
CPB, which cut its forecasts for the fourth time in a year, warned that the credit crisis and recession may still be worse than expected and that new problems in the financial sector could arise.
"There is also a risk of falling prices and wages (deflation) owing to the very deep recession," CPB said.
Overcapacity at firms and the labour market were the main risks for deflation, CPB head Coen Teulings told reporters.
Gross domestic product (GDP) declined at a rate of 4.5 percent in the January-March period on an annual basis, Statistics Netherlands (CBS) said last month.
"What we have experienced so far is a recession of unthinkable proportions. We have not experienced this since World War (Two)," Teulings said.
CPB had forecast in March that GDP would shrink 3.5 percent this year and 0.25 percent in 2010, but the new forecasts were still more optimistic than those of the Dutch central bank (DNB).
The DNB last week projected the Dutch economy -- which had a GDP of 595 billion euros in 2008 and is the 5th largest in the euro zone -- would contract 5.4 percent this year.
"The Dutch central bank assumes that the recovery in world trade will take a bit longer than we think, and it also expects a bit lower level of consumer spending due to the rise in unemployment," Teulings said.
The Netherlands, which depends on imports and exports for about two-thirds of its economic activity, will face a rise in its budget deficit, projected at 4.1 percent of GDP this year and 6.7 percent in 2010, CPB said.
However, Teulings said he did not see a need for additional government spending measures due to the worsened outlook.
But he did warn problems in the financial sector could arise due to new writedowns which banks and insurers are widely expected to take.
"You all have seen what the IMF has said about this. Substantial writedowns are necessary. IMF was estimating a total of $4 trillion would be needed while $1.5 trillion has been written off so far. There is a big gap between these numbers," Teulings said.
He declined to comment about specific Dutch banks and insurers, which include global players ING (ING.AS)(ING.N) and Aegon (AEGN.AS), both of which got billions of euros in state aid last year.
