This time a year ago, the debate focused on the following questions, writes Pat McArdle

Would interest rates rise? They didn't

Would the dollar strengthen? It didn't

Would the housing market collapse? It didn't

n Would decentralisation happen? It hasn't yet

Would the economy recover? It did.

An end of 2003 poll of 25 European forecasters predicted a half percent rise in interest rates in 2004.

Irish forecasters, as is their wont, were more extreme - one ageing bull believed that strong growth would see the European Central Bank (ECB) refinancing rate double to 4 per cent while a sizeable minority of bears predicted falls of up to half a per cent.

At Ulster Bank, we said they would hardly rise and I am happy to say they did not.

We expect rates to finally begin to increase in 2005 and agree with the European forecasters who now expect a half-point rise in 2005.

By late 2003, the dollar had fallen by 20 per cent against the euro to €1.25. European forecasters thought that it would go to €1.20, i.e. that the dollar would strengthen in 2005. The majority of Irish pundits agreed with this view and, if anything, were even more bullish on the dollar.

At Ulster Bank we had a different perspective, forecasting a decline to €1.30. Indeed, my Ulster Bank Financial Markets (UBFM) colleague Mr Niall Dunne was a lone voice in this regard. At time of writing, it is around €1.34. Our 2005 target is €1.40, minimum.

The European forecasters appear to have given up and are predicting no change from here to the end of 2006 while Irish forecasters are unusually reticent and it is not yet clear what they are predicting.

This time last year, though we were not to know it at the time, Mr Charlie McCreevy had just introduced his last Budget. His economic forecasts were well off target.

Higher-than-expected tax buoyancy eliminated the Budget deficit and meant that the hikes in excise duties, which added half a per cent to inflation, were quite unnecessary.

The best-known 2004 Budget measure was more political stroke than economic desideratum. Decentralisation was a bombshell that misfired, injuring some of its promoters in the process.

We expect the 2005 Budget to also come in well below the projected target deficit.

And what about the economy you ask. Well, this time we are on the other side of the fence in that we feel that the new Minister's 4.7 per cent GNP forecast is a trifle optimistic.

Our forecast is 4.25 per cent, well below the raging bulls who are going for 6 per cent or more. Our views are influenced by the outlook for the housing market, the global economy and, not least, the euro zone.

The economy is now dependent on the housing sector to an unprecedented extent.

It is driving growth, employment and tax receipts and a deceleration, which is inevitable, will have a significant impact.

House price inflation has finally begun to slow - in the past two months prices rose at a 4.3 per cent annual rate - and the average for the year will be around 9 per cent.

We got this one wrong. We expected a faster deceleration in price inflation and a slower rate of housing output in 2004.

However, we are sticking to our guns and have rolled these expectations forward to 2005 when we expect completions to fall to 73,000 and price rises to average 5 per cent.

This is a slowdown, not a crash but in itself will knock a good one per cent off 2005 growth.

The more subdued outlook for world trade is another reason prompting us to take a more cautious attitude.

The global economy expanded by 4 per cent in 2004, the highest since 1988, but is expected to post a 3 per cent rate in 2005.

All Irish export markets will be affected but many forecasters seem to assume that we can compensate by increasing market share. We are not so sure.

Third, we are more pessimistic on the dollar than others. The stronger euro will exacerbate competitiveness problems for euro zone and Irish exporters alike.

That is why we have plumped for a 4.25 per cent rate of GNP growth. In football parlance, this is good growth, not great growth, sufficient to keep the economy at full employment and inflation below 2.5 per cent. It is about half the rate experienced during the Tiger era.

Our new-year resolution is a hedging one. This has nothing to do with the garden but is a term used to describe the buying of insurance against financial risks.

Our advice to traders is always to hedge currency receivables/payables as their expertise is in their core business, not in financial markets. It is a bit more complex with interest rates.

Basically, if you have a mortgage, whether domestic or commercial, you should check to see if you can afford a 2 per cent rise in interest rates and if in doubt, take out protection.

This is frequently done by fixing monthly mortgage repayments for a period - typically three to five years - but new products mean that you are no longer constrained by the old fix or float rigidities.

In any event, now is a good time to act as interest rates for longer periods are close to historic lows and are likely to rise considerably in 2005.

Finally, if you are contemplating purchasing an investment property, be sure that you can also cope with a reduced or zero-income period as rents are still falling.

Pat McArdle is chief economist with Ulster Bank.