March 25 (Bloomberg) -- Colombia’s economy pulled out of its first recession in a decade in the fourth quarter as local demand picked up amid easing of the global credit crunch.

Gross domestic product expanded 2.5 percent from a year earlier, the first growth in a year, beating the median estimate of 1.7 percent in a Bloomberg survey of 31 economists. GDP rose 1.1 percent from the third quarter while for 2009 overall, the economy grew 0.4 percent, down from a revised 2.4 percent in 2008.

“The worst is now completely behind,” said Juana Tellez, head economist at BBVA Colombia. “There is going to be a sustained recovery, but not a quick one.”

To spur growth in Latin America’s fifth-biggest economy, the government has invested in infrastructure projects and attracted foreign investment while policy makers have slashed interest rates from a record 10 percent in November 2008 to 3.5 percent now. Bank lending picked up and consumers spent more on big-ticket items like cars and washing machines.

“Public works have been key to avoiding a greater deterioration of GDP,” said Daniel Nino, head of research at Bancolombia SA, the country’s biggest bank. “Infrastructure has lifted the economy.”

Growth, Spending

Public and private infrastructure spending this year may rise to 50.6 trillion pesos ($26.3 billion), of which the government will invest 23 trillion pesos, according to the president’s office. Colombia last year spent 46.5 trillion pesos on public works, of the government’s goal of 55 trillion pesos.

Foreign direct investment this year will probably reach $8.3 billion, Colombia’s Planning Director Esteban Piedrahita told reporters today.

Colombia’s growth rate may not be as fast as expected this year and the economy may “underperform,” Nomura Holdings Inc. strategist Tony Volpon wrote in a report dated March 23. He lowered his 2010 economic growth forecast to 3 percent from 3.3 percent previously.

The government maintained its 2.5 percent growth target for 2010, Piedrahita said.

A budget deficit and sluggish job creation are an “impediment” to growth, Volpon said in the report. The government has targeted a consolidated budget deficit this year of 3.7 percent, up from 2.7 percent last year.

The central government deficit will rise to 4.5 percent from 4.1 percent last year, Finance Minister Oscar Ivan Zuluaga said in January.

“The outlook for the deficit, much like other key variables, depends largely on the outcome of upcoming presidential elections, as any hope for structural reforms and a normalization of the relationship with Venezuela is seen as lying with the new president,” said Volpon.

Venezuela, Global Outlook

A plunge in trade with Venezuela has contributed to the weak economy, said Alberto Bernal, head of emerging-markets research at Bulltick Securities Corp. in Miami.

Venezuelan President Hugo Chavez pledged in July to end imports from his neighbor in response to a deal to allow the U.S. armed forces access to seven Colombian military bases.

Exports to Venezuela may fall to $1.5 billion this year as a lingering recession and electricity crisis further suppress the country’s demand for Colombian goods. That’s down from $6.1 billion in 2008, according to the national statistics agency.

The trade spat cut as much as 1 percent from last year’s GDP, Piedrahita said.

“The economic blockade now being followed by Venezuela against Colombian exports, lingering problems in the world financial system, and a strong foreign exchange rate, will hinder Colombia from showing growth rates in line with potential during 2010, as Brazil, Mexico, or Chile, will likely do,” said Bernal.

Chavez has said he would seek “constructive and positive” ties with the next Colombian government when President Alvaro Uribe stands down in August.

Elections

Colombia’s former Defense Minister Juan Manuel Santos is favored to lead the first round of voting for presidential elections according to a poll conducted by Gallup Colombia Ltda.

Santos, who heads the ticket for La U party, had the backing of 34.2 percent of those surveyed between March 20 and 22, followed by Noemi Sanin of the Conservative Party, who had the support of 23.3 percent of those polled. Green Party candidate Antanas Mockus would garner 10.4 percent, according to the poll of 1,200 people nationwide.

The survey in 50 cities had a margin of error that ranged between from 3 to 7.1 percentage points.

Santos has said he would seek to improve relations with Venezuela if elected.

Construction revenue grew 22 percent in the fourth quarter from a year ago, while the mining sector expanded 15 percent and finance grew 2.8 percent, according to the statistics agency.

Industrial output fell 1.4 percent during the quarter and transport slipped 0.2 percent.

With the year-on-year expansion in the fourth quarter, Colombia leaves behind its first recession, defined as two consecutive quarters of shrinking year-on-year GDP, since 1998 and 1999, when insurgent violence and a banking crisis helped trigger six straight quarters of contraction.

The government has said the economy wasn’t in recession since the quarter-on-quarter data was improving.

The peso rose 0.1 percent to 1926.95 per dollar from 1929.30 yesterday. The gain extended the peso’s three-month rally to 6 percent, the best performance against the dollar among 26 emerging market currencies tracked by Bloomberg.