May 11 (Bloomberg) -- Latvia’s economic output plummeted a preliminary 18 percent in the first quarter, the steepest drop in the European Union, as manufacturing and retail sales shrank because of the global financial crisis.

The contraction, the largest since quarterly records began in the Baltic nation in 1995, gathered pace after gross domestic product declined 10.3 percent in the fourth quarter, the central statistics office in Riga said today. The median estimate in a Bloomberg survey of 11 economists was for a 16.2 percent fall. Final economic data will be published on June 9.

Latvia, which had the fastest-expanding economy in the EU in 2006, has been the worst hit of the three Baltic states by the global crisis. It turned to a group led by the International Monetary Fund and the European Commission for a 7.5 billion-euro ($10.2 billion) bailout after the economy stalled and the government’s takeover of the second biggest bank.

“First-quarter GDP will be disastrous” in both Latvia and Estonia, Neil Shearing, an emerging-market economist at Capital Economics Ltd. in London, said on May 8 in an e-mail, noting that Lithuania’s 12.6 percent contraction in the first three months, reported on April 28, was “a sign of just how bad things have got.”

Latvia’s recession is gaining pace after a real estate boom ended, domestic demand collapsed and the government began trimming expenditure and cutting state wages. Swedbank AB, the biggest Baltic bank, estimates that Latvian GDP will contract 15 percent this year.

Estonia’s GDP probably contracted between 14 percent and 16 percent in the first quarter from a year earlier, Finance Ministry Head of Economic Analysis Andrus Saalik said on May 8. Estonian economic data will be released on May 13.

To contact the reporter on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net

Last Updated: May 11, 2009 06:03 EDT