AMSTERDAM, Dec 10 (Reuters) - The Dutch economy is in worse condition than originally believed, the country's central bank said on Monday, forecasting that it will now shrink over the coming year.
The budget deficit will also exceed the European Union's 3 percent limit in 2013, according to the bank.
Both forecasts pose a challenge to Prime Minister Mark Rutte's newly elected government, which is imposing nearly 30 billion euros of austerity measures agreed earlier this year.
The bank said in its semi-annual economic outlook 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.
The Netherlands is the euro zone's fifth-largest economy. Although part of the core, it 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.
The Liberal-Labour coalition government has fallen in popularity since announcing a 16 billion euro ($20.7 billion) austerity package in October.
It has led to a rise in opinion polls for both the anti-establishment Freedom Party, led by anti-Islam politician Geert Wilders, and for the far-left Socialist Party.
The central bank said the euro zone's debt crisis remained a major threat for the Netherlands.
"The European debt crisis is far from resolved and still poses the biggest downside risk to the economic outlook," the it said.
Rating agency Moody's has warned of potential downgrades for the triple-A rated Netherlands, Germany and Luxembourg because of the debt crisis. It singled out the weak economic outlook, and high mortgage debts in the Netherlands.
The central bank expected house prices to be more than 21 percent lower in 2014 compared with a peak in 2008. House prices have already fallen more than 16 percent since the peak.