AMSTERDAM (Reuters) - The Dutch economy will contract more sharply this year than previously forecast and barely grow in 2014 and will need more austerity measures to meet its targets, the central bank said on Monday.
In its semi-annual economic outlook, the Dutch central bank (DNB) said the weaker outlook would result in a budget deficit of 3.9 percent of economic output next year, up from 3.5 percent this year. It had previously forecast a stable deficit of 3.5 percent in 2013 and 2014.
The Netherlands, the euro zone's fifth-largest economy, is in its third recession since 2009 and is implementing 46 billion euros ($61 billion) in budget cuts and tax hikes to bring down government spending.
The central bank now expects the economy to shrink by 0.8 percent this year, worse than its forecast in December for a 0.6 percent contraction. It also halved its forecast for growth next year to 0.5 percent from 1 percent and said more austerity would be needed.
"The forecast course of the factual and structural deficit in 2014 does not meet the recommendations given in May by the European Commission to correct the excessive budget deficit in the Netherlands. Extra consolidation measures are therefore necessary," the central bank said.
The European Commission last month gave the Netherlands until next year to reduce its deficit to 2.8 percent of GDP from an original deadline of 2013. It urged the Dutch government to cut spending by 6 billion euros next year to bring the deficit below the EU's official ceiling of 3 percent of GDP.
The Netherlands is one of few European countries to retain a triple-A credit rating but the three main rating agencies have warned it could lose that coveted status, citing the euro zone debt crisis and the weak economy, which shrank 1.7 percent year-on-year in the first quarter.
A 20 percent fall in house prices since 2008, pension cuts, and the highest unemployment level in 19 years have led to sharp falls in consumer and corporate spending.
"After the credit crisis, the Dutch economy has much trouble of getting out of the downturn. In 2013 and 2014, GDP growth is still well below the level which is normally feasible," the bank said in its outlook.
Finance Minister Jeroen Dijsselbloem, who also chairs the Eurogroup of euro zone finance ministers, will decide in August, along with the Dutch government, whether extra measures are needed to reduce the deficit.
Reporting by Gilbert Kreijger; Editing by Susan Fenton