RIGA, Latvia (AP) — Latvia’s economy crashed in the third quarter, the national statistics office said on Friday, with output shrinking 4.2 percent year-on-year as the global financial crisis accelerated the Baltic nation’s woes.

The contraction comes after three years of stellar economic performance, when Latvia topped the European Union in annual GDP growth, and could complicate its wish to adopt the euro.
The result contrasts with the same quarter in 2007, when the Baltic state’s GDP soared 10.9 percent from the year earlier. First quarter growth this year was 3.3 percent, while in the second quarter it slowed to 0.1 percent.
Though many Western economies are also threatened with shrinking economies after this fall’s financial meltdown, Latvia’s case is exacerbated by three years of double-digit growth fuelled by rampant consumption.
On Monday the European Commission released a forecast that Latvia’s economy would contract 0.8 percent this year and another 2.7 percent in 2009.
Faced with plummeting revenues, Latvia’s center-right government is scrambling to slash expenditures. Earlier this week it agreed to close two small ministries — on integration and EU funds — as one cost-cutting measure.
Latvia’s central bank chief, Ilmars Rimsevics, has slammed the government for putting together a deficit budget for 2009. The planned deficit of 1.85 percent of gross domestic product is not realistic and will actually balloon to 4 percent of GDP, Rimsevics was quoted as saying by the Diena daily in an interview published on Friday.
The European Commission forecast a deficit of 5 percent.
A deficit of more than 3 percent of GDP will further harm Latvia’s wish to adopt the euro at the earlier possible date, possibly in 2012.
Latvia, which joined the EU in 2004, is also saddled with rampant inflation. In September consumer prices climbed nearly 15 percent year-on-year.
Propelled by easy credit and a consumption binge, Latvia’s economy peaked in 2006 with GDP growth of 12.2 percent.
Economists, however, warned that the economy was overheating, and they now agree that Latvia’s government was too slow to heed the advice.