AMSTERDAM: The Dutch economy will slip into a recession this quarter as companies and consumers cut spending because of the euro zone crisis and the budget deficit will exceed 3 percent of GDP in 2011-2013, the Dutch central bank said on Friday.
As a result, the central bank said the government will need to make further spending cuts, a move which could increase tension between the ruling coalition and its main ally in parliament.
The forecasts, announced in the central bank's semi-annual economic report, paint a gloomier picture of the Dutch economy than in its June report, and are based on the assumption that Europe's debt crisis will be resolved without any big shocks.
The last Dutch recession was two years ago, when the economy either shrank or showed zero growth for five consecutive quarters up to and including the second quarter of 2009. That recession followed a slump in world trade and recession in neighbouring trade partners, such as Germany.
The Dutch economy will shrink by about 0.4 percent in the October-to-December period compared with the preceding quarter, when gross domestic product (GDP) fell by 0.3 percent, the Dutch central bank said.
The euro zone's fifth-largest economy will suffer from slower growth in world trade, which is important for the export-dependent country, the central bank said.
"Worsened sales expectations for companies will result in minimal investment growth in 2012 and a careful staffing policy. Households will see their disposable income fall in 2012 and will save more, especially because house prices are declining," the central bank said.
The government had aimed to bring the budget deficit below 3 percent of GDP, the European Union's official ceiling, as soon as 2012 thanks to 18 billion euros ($24 billion) of spending cuts.
But the central bank forecast a deficit of 3.5 percent of GDP next year, rising to 3.7 percent in 2013. The deficit is seen at 4.4 percent this year.
"The budget rules prescribe in this case extra cuts," the central bank said, referring to 2013. Job Swank, an executive director at the central bank, told a press conference that an additional 5 billion euros of cuts might be necessary.
The government is currently looking at options to cut an additional 6 to 10 billion euros, such as reducing unemployment benefits or housing market subsidies, Dutch public broadcaster NOS said, citing sources close to the government.
Dutch politicians have already discussed whether the government needs to cut spending even more: as part of its austerity programme, the government has already earmarked 18 billion euros of spending cuts by 2015.
In a scenario where the international economy and world trade stagnate due to lack of consumer spending growth in the industrialised world, the Dutch government budget deficit and state debt would worsen, the bank said.
The Netherlands, which has a triple A credit rating, has benefited from low interest rates for its borrowing but this may change, the bank said.
"A relatively large part of the debt is funded at a low Dutch money market rate. To keep these favourable funding conditions in the current situation the Dutch government will have to further improve its finances."
The Dutch state forecasts a borrowing requirement of 100 billion euros next year, the state debt agency said in a statement on Friday, down from a 2011 borrowing requirement of about 106.2 billion euros as stated in September.
Citing current market uncertainty and the higher deficit projections for 2013 and beyond, the debt agency said it would borrow more long-dated paper, with plans to raise 60 billion euros in the bond market and the rest in the money market.
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