B737-800 First Officer reported ingestion of a balloon into engine during climb. Flight referenced checklist and returned to departure airport uneventfully.

Narrative

During climb out on the ZZZZZ departure around 5000ft we saw an object; which we believe was some sort of balloon; directly in front of us. Within 2-3 seconds the object was ingested by ENG 2. The aircraft jolted and there was a loud bang heard throughout the aircraft. We then had a flashing amber THRUST indication on the Engine Display; decreasing N1 and EGT rise. This lasted for a few seconds. The Captain was PF and called for ENGINE SEVERE DAMAGE/SEPARATION checklist initially. [We] Requested Priority Handling and we received vectors for a return to ZZZ. We began to follow the checklist but both noticed that Engine indications were returning to normal. At some point the Autopilot was engaged. We then agreed on instead running the ENGINE SURGE/STALL checklist. Once the checklist was complete we both agreed that the Engine appeared to be running normally but we were unsure of potential damage. We elected to keep ENG 2 at idle and only use ENG 1. At this time the Captain gave me control of the Aircraft and I remained PF for the remainder of the flight. We decided to treat this as a single engine approach and ran the ONE ENGINE INOPERATIVE LANDING checklist. The NON ROUTINE LANDING CONSIDERATIONS checklist was also accomplished. We set up for a FLAPS 15 landing on Runway XX in ZZZ. The approach and landing were uneventful with ENG 1 as the main source of thrust and ENG 2 left at idle. We made a full stop on RWY XX. Once we stopped; we elected to shutdown ENG 2. ARFF (Airport Rescue and Firefighting) made there way on to the runway and inspected ENG 2; with no notable damage seen. We then taxied uneventfully to gate XX and deplaned. During the deplaning process it was brought to our attention that a passenger on the right side of the aircraft saw flames coming from ENG 2 shortly after impact and a Flight attendant reported seeing a bright flash from the right side of the aircraft. A post flight was performed with no notable damage or residue found but maintenance was able to find pieces of what appeared to be a pink balloon in ENG 2.Cause: I feel that we handled this emergency well. I think specifically what we handled well was the fact that the situation had changed with the engine indications and that ENG Severe damage was no longer the appropriate checklist and we elected to change to the ENG Surge/Stall. We stayed on the safe side of things and kept the engine at idle to reduce risk of potentially more problems and returned to the airport.