Sept. 24 (Bloomberg) -- Colombia’s economy shrank for a third straight quarter in the April-June period, the longest slump in a decade, as the global credit crunch cut exports and domestic demand fell.

Gross domestic product fell 0.5 percent in the second quarter from a year earlier, the national statistics agency said today, following revised declines of 0.4 percent and 1.1 percent in the two prior quarters. Economists expected a 0.6 percent decline, according to the median of 22 forecasts in a Bloomberg survey.

“There’s a substantial slowdown in economic activity and it’s reasonable to say that Colombia is underperforming its economic potential,” said David Duarte, a Latin America analyst at 4Cast Inc. in New York.

To spur growth in Latin America’s fifth-biggest economy, policy makers have slashed interest rates from a record 10 percent in November to 4.5 percent over seven months. The bank is expected to keep rates at that level for another month at its board meeting tomorrow, according to all 26 economists surveyed by Bloomberg.

The combination of lower lending rates, government steps to stoke domestic demand and recovery in the global economy may push the $242 billion economy to post positive growth in 2009.

President Alvaro Uribe today said that demand and investment may pick up in the second half of the year, pushing the economy to a tenth consecutive annual expansion. Finance Minister Oscar Ivan Zuluaga said today the economy will grow 1 percent in the second half.

“We hope we can have a positive result this year despite all the difficulties,” Uribe said in New York.

Outlook, Spending

Zuluaga forecasts 2009 economic growth at 0.5 percent to 1.5 percent while central bank chief Jose Dario Uribe forecasts zero growth this year and an expansion between 2 percent and 3 percent next year.

Zuluaga, who is also president of the central bank’s board, said he hopes as much as 55 trillion pesos ($28.5 billion) of infrastructure spending this year will fuel growth and create as many as 800,000 jobs.

“The impact of government spending is what’s helping compensate for the slowdown in the rest of the sectors,” said Julian Ramirez, head analyst at Bogota-based brokerage Proyectar Valores SA. “The bad part is that the government can’t keep spending like this unless it goes further into debt.”

Recession, Outlook

It’s the country’s first recession, defined as two consecutive quarters of shrinking GDP, since 1998 and 1999, when insurgent violence and a banking crisis helped trigger six straight quarters of contraction. The government says it’s not in recession since the quarter-on-quarter data is improving.

The yield on Colombia’s 11 percent bonds due in July 2020 fell seven basis points, or 0.07 percentage point, to 9.15 percent, according to the stock exchange. The peso weakened 0.6 percent to 1927.82 per dollar from 1917.35 yesterday.

Construction revenue grew 16.8 percent from a year ago, limiting the economy’s overall contraction in the second quarter, while the mining sector expanded 10.2 percent and finance grew 4.3 percent.

Industrial output fell 10.2 percent during the quarter and trade slipped 3.9 percent, according to the statistics agency.

“The second quarter should mark the beginning of the recovery,” said Rafael de la Fuente, chief Latin America economist at BNP Paribas SA in New York. “Investment has held up better than in other counties, but internal demand has taken a hit.”

A diplomatic spat between Venezuela and Colombia may slow the pace of growth going forward, said Ramirez.

Venezuelan President Hugo Chavez in July said he would freeze relations with Colombia and find alternative sources for imports after his Colombian counterpart announced a plan to allow U.S. troops to use military bases for anti- drug operations.

“The reestablishment of trade with Venezuela will be the deciding factor if we manage a positive full year figure,” said Proyectar Valores’s Ramirez.

To contact the reporters on this story: Helen Murphy in Bogota at Hmurphy1@bloomberg.net; Alexander Cuadros in Bogota at acuadros@bloomberg.net

Last Updated: September 24, 2009 18:01 EDT