Aug. 14 (Bloomberg) -- Venezuela's economy in the second msgquarter expanded at the slowest pace in two years, cooled by a decline in the oil industry and a pullback in the growth of government spending.

Gross domestic product expanded 8.9 percent, down from a revised 9.1 percent in the first quarter and 9.4 percent in the same quarter a year earlier, the central bank said today in an e- mailed statement.

``The government slowed spending and reduced liquidity, and that had an effect on growth,'' said Miguel Octavio, executive director of Caracas-based brokerage Bbo Servicios Financieros Inc. ``Public spending can't keep expanding at the same rate.''

Venezuela, the world's sixth-biggest oil exporter last year, is curbing spending after public expenditures surged 45 percent in 2006, fueling the fastest inflation in South America. The oil industry suffered in the quarter as crude prices fell and the country reduced output to meet new quotas set by the Organization of Petroleum Exporting Countries.

Oil industry activity contracted for a fourth straight quarter, declining 3.9 percent from a year earlier, the central bank said. Oil exports fell to $15.1 billion, from $16.6 billion.

In the first half of 2007, economic growth eased to 9 percent from 9.6 percent last year. Finance Minister Rodrigo Cabezas said today the government is trying to restrain liquidity in the market, and reiterated his forecast that the economy will expand at least 8 percent this year.

Trade Figures

Total exports fell 8.2 percent to $16.8 billion in the second quarter from $18.3 billion a year earlier. Imports rose 38 percent to a record $10.9 billion.

The current account surplus plunged 40 percent to $5.1 billion, the bank said.

Increased government spending and exchange controls that prevent capital flight have led to a surge in the money supply, prompting banks to increase lending. That has spurred demand for consumer goods and pushed up inflation.

``All these imports are only for consumption,'' Octavio said. Retail sales rose 41.2 percent in May from a year earlier, and vehicle sales rose to a record in July.

Venezuelan consumer prices rose 17.2 percent in July, down from 19.4 percent in June.

The government may do away with its restrained spending policies in the second half of the year as President Hugo Chavez ramps up programs to woo voters ahead of a national referendum on his new constitution, Octavio said.

Private-industry oil activity declined 11.6 percent in the second quarter, the central bank said. Non-oil activity increased 10.8 percent.

To contact the reporter on this story: Alex Kennedy in Caracas at akennedy1@bloomberg.netMatthew Walter in Caracas at mwalter4@bloomberg.net

Last Updated: August 14, 2007 20:36 EDT