Italy's economy grew faster than any other major European country last year but growth is expected to slow this year. Gross domestic product (GDP) grew by three per cent, compared with 2.1 per cent in 1994. The state statistical institute, Istat, said that, in the final quarter of last year, GDP declined 0.9 per cent from the third quarter and expanded 2.3 per cent from the same quarter a year earlier. The slowdown in the fourth quarter was largely a result of a decline in exports and low consumer demand. Although Italy's economic growth would be the envy of Europe, the country also has a huge budget deficit. Borrowings total over 2,200 trillion lire (about HK$10.81 trillion), giving Italy the highest ratio of national debt to economic output of any of the Group of Seven (G7) leading industrialised nations. The new Prime Minister, Romano Prodi, has put the fight against the huge state debt at the top of his government's political agenda. One of the first items facing his cabinet will be to work out a mini-budget to prevent 1996 accounts overshooting their deficit targets. Mr Prodi, an economics professor, led his centre-left Olive Tree coalition to victory in the general elections in April. He appointed a 20-member cabinet which includes two former premiers. On Friday, Mr Prodi won a vote of confidence in the Chamber of Deputies (lower house). This follows a similar result in the Senate (upper house) the previous week. Mr Prodi is expected to present proposals to reduce the 1996 budget, which is projected to overshoot its original target by about US$7.7 billion. 'Much of the tough budget work has been done,' Claudio Tosato, senior economist with Deutsche Bank in Rome, said. Compared with Italy, Germany, France and Britain all have debt to GDP ratios of less than the European Monetary Union (EMU) target of 60 per cent. Analysts say that if Italy is to qualify for EMU membership under the 1992 Maastricht treaty guidelines, it should seek to reduce its annual budget deficit to GDP ratio to three per cent by 1997, from the 7.4 per cent recorded last year. The economic growth in the fourth quarter was slightly revised from Istat's estimate in a preliminary report on March 1, when it said GDP fell one per cent during the quarter and climbed 2.4 per cent in the year. Istat warned economic growth could slow again in the first half of this year. It said production continued to grow while domestic demand barely rose in the second half of 1995. Stockpiles grew as a result, which was likely to reduce orders in the months ahead. 'Companies in the second half of the year signalled an undesirable accumulation of finished goods,' Istat said. Exports in the fourth quarter declined 2.2 per cent from the previous quarter, while domestic consumption fell 0.2 per cent. Capital investment grew 1.8 per cent and there was a pick-up in construction, which grew 1.9 per cent, Istat said. An increase in capital investment and exports was behind the 2.3 per cent growth in the quarter from a year ago. Investment was up 7.7 per cent and exports grew 6.3 per cent, while domestic consumption increased slightly. Throughout, Italy's recent strong growth domestic consumption has remained flat with all the growth coming from exports and investments. Tax incentives that drove investment spending higher last year are due to be phased out this year.