Central European and Baltic region economies are set to bounce back as the eurozone comes out of recession, according to a new report from the European Bank for Reconstruction and Development (EBRD). 

The report says the region saw an increase in growth in the second quarter of the year as the eurozone showed signs of emerging from recession, despite unemployment rates of 11% (in the EU28) and the likelihood of negative growth in 2013 as a whole.

Latvia recorded the highest growth in the region, expanding its economy by 4.2%, followed by Lithuania (3%) and Estonia (1.2%). Productivity increases and gains in export market shares have provided a solid foundation for growth in the Baltic region, which seems well positioned to take advantage of the gradual European recovery.

Evidence of the healthiness of the Baltic economies is supported by the latest unemployment indicators from Eurostat; Latvia (down from 15.6% to 11.3%) and Estonia (10% to 8.3%) have seen the biggest year-on-year decrease in unemployment among the EU28, while Lithuania is also heading in the right direction (13% to 11.9%).

The key economies of the central Europe and Baltic region, Hungary and Poland, witnessed a cyclical recovery in the second quarter of 2013. The 2012 Hungarian recession was ended with the help of a newly expanded central bank lending scheme. Meanwhile, retail sales in Poland are on the up, backed by real wage trends, though country still faces challenges with depressed public and private investment spending, which are obstructing future recovery.

Slovenia is expected to remain in recession in 2014, facing a downturn in economic growth (-2.4%) and a year-on-year increase in unemployment (9.5% to 10.2%). Burdened by constrained domestic demand and high indebtedness in the corporate sector, the country is expected to face a banking sector deleveraging and potentially recapitalisation.

The newest member of the EU, Croatia, also remains in recession, with problems of uncompetitive industries, labour market inflexibility and a large inefficient public sector all contributing to negative growth of -0.8%.

The region will continue to operate in an environment dominated by the ongoing eurozone problems and the risk of defaults and insolvencies by financial institutions in larger member countries. Recovery of trade is expected to be slow, and the risk of potential withdrawal of funding in the region remains a worry as it could quickly trigger recession in emerging Europe.