Feb. 13 (Bloomberg) -- The Estonian and Hungarian economies contracted in the fourth quarter, while the economic expansion in the Czech Republic and Slovakia slid as the continent’s recession spreads.

Estonia’s economy shrank in the fourth quarter an annual 9.4 percent, the most in at least 15 years, while Hungary’s economy contracted 2 percent, plunging into the second recession in two years. The economic expansion slowed to 1 percent in the Czech Republic and to 2.7 percent in Slovakia in the period.

East Europe’s economies are being hit as the global crisis curbs demand for exports such as cars and electronics and shuts off investment and credit. Central banks in the region are slashing interest rates on concern economies may cool further, while governments are cutting growth outlooks and crafting measures designed to foster a recovery.

“The data was all pretty grim,” said Neil Shearing, an emerging Europe analyst at Capital Economics in London. “The big point is it will become worse before it gets better. The region’s economy may contract 3 percent this year, while the consensus in the market still seems to be for a 1 percent growth.”

Eastern Europe is not alone. The euro region’s economy contracted the most in at least 13 years in the fourth quarter, compounding pressure on the European Central Bank to reduce interest rates to the lowest ever next month.

Baltic Bust

Gross domestic product in the 16 nations sharing the common currency declined 1.5 percent from the previous three months, the European Union’s statistics office in Luxembourg said. From a year earlier, GDP fell 1.2 percent in the fourth quarter, the only full-year drop on record.

Still, the Baltic states of Estonia and Latvia have fared the worst in the EU. Their economies have crashed into the worst contraction since independence in 1991 as the global credit freeze compounds a slump in domestic demand following a three-year lending boom in the region. Latvia’s GDP shrank a preliminary 10.5 percent in the fourth quarter.

Estonia’s economic performance in the last quarter of 2008 was the second worst in the 27-member European Union.

A “steep decrease” in industrial output, especially manufacturing, had a “substantial impact on the decrease of the GDP,” the statistics office said.

Estonia’s central bank said today the Baltic nation’s economy won’t return to growth until 2010.

Hungarian Recession

In central Europe, Hungary plunged into recession as export demand was curbed by the contraction in the euro region, dashing hopes of a recovery from the slowest growth in 14 years.

“The Hungarian economy is shrinking rapidly,” Bartosz Pawlowski, a strategist at TD Securities in London, said in an e- mailed note to clients. “We now think that the Hungarian economy is likely to shrink by 4 to 5 percent in 2009.”

The government, which expects the economy to contract 3 percent this year, had to line up 20 billion euros ($25.7 billion) of loans from the International Monetary Fund, the European Union and the World Bank. It is to unveil a plan to overhaul taxes to boost growth.

In the Czech Republic, economic growth cooled in the fourth quarter as the global crisis reduced exports and investments.

GDP expanded a preliminary 1 percent from a year earlier, the slowest pace in almost 10 years, compared with an advance of 4.2 percent in the previous quarter, the Prague-based statistics office said. GDP contracted 0.6 percent in October through December, compared with the third quarter of 2008.

Export Effect

The global crisis “left the Czech Republic actually untouched but has resulted in a significantly reduced demand for goods and services worldwide,” the office said. “This confronts the strongly export-oriented Czech economy with sizeable selling difficulties aggravated by the more cautious approach of commercial banks toward financing the business sector and population.”

The Czech koruna strengthened 0.5 percent to 28.530 per euro at 10:32 a.m. in Prague, while the Hungarian forint advanced 0.7 percent to 296.15 against the common currency.

In neighboring Slovakia, the economy expanded at the slowest pace in seven years, after advancing 7 percent in the previous three months, the Slovak Statistical Office said.

Slovakia’s central bank expects growth to slow to 2.1 percent this year from a record 10.4 percent in 2007

“The era of fast growth is over,” said Eduard Hagara, an economist at ING Bank in Bratislava, Slovakia. “Since Slovakia is a small and open economy, foreign demand plays a key role for its economic growth.”

While the office did not release a detailed breakdown of the data, economists said the slower pace of growth was mainly due to weaker exports, indicated by falling industrial production in the last three months of 2008, led by carmakers including Kia Motors Corp.

At the same time, domestic demand was hurt by rising unemployment and companies’ decisions to defer investment because of the credit crunch and uncertainty over sales, economists said.

To contact the reporters on this story: Andrea Dudikova in Prague at adudikova@bloomberg.net

Last Updated: February 13, 2009 05:35 EST