By Conor Humphries and Padraic Halpin
DUBLIN (Reuters) - Ireland emerged from its second recession in five years in the second quarter but tepid growth left official forecasts for the year in doubt and may dash government hopes of easing up on austerity.
The country is set to become the first to exit an EU/IMF bailout later this year after returning to debt markets but its economy still needs to start growing by more than 2 percent from next year onwards to help make its national debt sustainable.
It must also keep up a relentless austerity drive to trim Europe's highest budget deficit, although Finance Minister Michael Noonan had hoped that a positive reading would allow him to introduce a less stringent budget than planned next month.
But growth of just 0.4 percent in the three months to June and a decline of 1.2 percent year-on-year may leave Noonan with little room for manoeuvre on the planned 3.1 billion euros of tax hikes and spending cuts due to be implemented next year.
"There's no reason to be throwing our hats in the air or anything like that," Noonan told reporters.
"It's still going to be quite a difficult budget but it does give us a foundation for building the budget and a strategy for exiting the programme. It's moving in the right direction."
Dublin has consistently beaten deficit goals set under its bailout agreement and the European Central Bank cut it some slack on future targets in February when it delivered savings on debt servicing as part of a long-sought after bank debt deal.
Noonan and Prime Minister Enda Kenny promised at the time that those savings would mean 1 billion euros less in budget cuts over the next two years. Others, however, including the European Union and International Monetary Fund lenders and Ireland's central bank, would prefer the money to be held as a cushion for the economy in case of shocks.
Members of the junior coalition Labour party, which is suffering in opinion polls, have called for austerity to be reined in and insist that Ireland can still meet its bailout targets with a less exacting budget.
"Austerity for austerity's sake isn't what people want," said Labour member of parliament Derek Nolan, who along with four backbench colleagues wrote an opinion piece in the Irish Times newspaper last month demanding a softer budget.
Ireland's emergence from a short recession was slower than anticipated, economists polled by Reuters having forecast gross domestic product would bounce back from three quarters of decline with growth of 0.8 percent in the second quarter.
After Ireland's trade-dependent economy was hit hard by the downturn in Europe, exports rose by 4.3 percent compared with the first quarter, while consumer spending rose 0.7 percent after both suffered big falls in the previous three months.
With Ireland's jobless rate at a three-year low, economies in major trading partners picking up and indicators pointing towards a more positive third quarter for the domestic economy, most economists expect growth to accelerate in the second half.
Ireland's government forecast in April that the economy would grow by 1.3 percent for 2013 as a whole. Economists polled by Reuters last month predicted growth of just 0.5 percent.
"Overall it's good, it's going in the right direction, but maybe not as fast as you would hope. People will probably be downgrading their forecasts for the year towards flat," KBC Ireland chief economist Austin Hughes said.
(Editing by Catherine Evans)