Sudden deterioration hits Slovakia but Forbes believes this will be a short-lived effect.

The scale of the first quarter contraction may be deep but the fall in Slovak output is not the same as other countries in the region.

Slovakia, which only joined the euro zone at the start of this year, has been pummelled by the collapse in car manufacturing, which accounts for nearly 15 percent of the economy.

In a statistical curiosity though, Slovakia is technically not in recession even though it contracted by more than any country in Europe, apart from Latvia - the official definition of a recession is two consecutive quarters of negative growth. In the fourth quarter of 2008, Slovakia grew by 2.1 percent.

As it raced towards euro membership, Slovakia looked to become a magnet for car producers, as they looked for relatively cheap labor inside the single currency zone. It has attracted South Korean Kia Motors Corp, PSA Peugeot ( PEUGY.PK - news - people ) Citroen SA and Volkswagen AG ( VLKAF.PK - news - people ) in the capital, Bratislava.

Latvia's problems appear to be far more deep-rooted. While many analysts expect Slovakia to start recovering when global demand picks up again - some even think that could happen as soon as the second quarter this year when a raft of car scrappage schemes around the world come into effect and dealers must restock depleted inventory - Latvia still has a mountain to climb to deal with the recession on top of a collapsed real estate and credit bubble.

Recovery in the region will depend on what happens in the richer countries of Western Europe, which are key trade partners.
Related Stories

"The bottom line remains that, while the worst of the financial crisis may have passed and the pace of decline in the real economy should now slow, a lasting return to positive growth remains dependent on a sustained recovery in the euro-zone and global risk appetite," said Neil Shearing, emerging Europe economist at Capital Economics in London.

All countries in Eastern Europe are facing their most difficult economic times since they began their transition from communist rule in the early 1990s. Latvia's Baltic neighbors Lithuania and Estonia contracted 9.5 percent and 6.5 percent respectively, while Hungary saw output fall by a further 2.3 percent, its fourth straight decline.

Eastern Europe is suffering in the global recession because its main sources of capital and credit have largely dried up, prompting some - Hungary, Latvia, Romania, Ukraine and Serbia - to go to the IMF for help to sustain their state finances and currencies.

Recently, the International Monetary Fund warned of worse to come if the European Union does not do more to fix the financial problems on its doorstep in Eastern Europe.

Associated Press Writer Karel Janicek in Prague, Czech Republic contributed to this report.

Copyright 2009 Associated Press. All rights reserved.