Which economic leaders will be smiling and which will be sighing, asks Cliff Taylor, Economics Editor

Last year ended with some optimism about the economic outlook - but will it be a happy new year? Economic analysts in stockbroking firms and banks are paid much money to forecast that GNP will grow by such a per cent and that the euro will end the year stronger/weaker/ about the same.

But if any of them really knew where the Dow Jones was going to end this year, whether the dollar would rise or fall and which nag would win the 3.30 at Kempton Park, they wouldn't be telling the rest of us.

So we kick off the New Year, not by offering firm predictions, but instead, with five reasons to be cheerful for 2004 - and five things which give cause for some concern.

Reasons to be cheerful:

1. There is no doubt that the US economy is recovering. It rebounded strongly in the third quarter - helped by low interest rates and tax cuts - and policy continues to support expansion. Inventory levels have fallen, businesses are back investing and consumer confidence has improved. The 8.2 per cent annualised growth rate recorded for the 3rd quarter will not be sustained, but growth momentum is reasonable heading into this year.

2. There are some signs that the worst may be over for the big euro zone economies.

Confidence and activity indicators suggest that the industrial sector is improving and the latest EU forecasts are for euro zone growth of around 2 per cent this year.

Still modest, to be sure, but at least an improving trend.

3. And at home... The economy here showed considerable resilience during the international downturn. The latest quarterly survey - the best measure of unemployment - showed that the rate edged over 5 per cent in the middle of the year.

Subsequent live register figures suggest that unemployment fell again later this year as economic growth picked up.

If the international recovery is sustained, then our economy can only benefit moving into 2004 as exports pick up and possibly inward investment too.

4. Inward Investment: IDA Ireland is forecasting that this year will be the best since 2000 in terms of new investments into Ireland and of growth in existing companies here.

The organisation said in its end-year statement that it is now competing "for some very significant investments of high value and considerable skill content". Last year saw the announcement of some encouraging investments from the likes of internet companies Google and eBay.

5. Market upturn: The three-year collapse in equity markets up to the middle of last year dented confidence and hit investment. Markets have made gains in recent months and now look more stable at reasonable valuations.

Reasons to be cautious:

1. The dollar: This is one significant area of risk for 2004. A sharp dollar depreciation - following on from this year's decline of some 20 per cent against the euro last year - would put pressure on an already sluggish euro zone export sector.

It could also destabilise international markets. The reason for fearing such a decline is nervousness about the huge US balance of payments current account deficit. The other side of the argument is that the relative strength of the US economy should support the greenback. Which view is taken up by investors next year will have a critical impact on the world economy.

2. Pressure on lower value jobs: There is a relentless drift of lower value manufacturing and tradeable service jobs eastwards - to the states joining the EU next year and the Far East. The latest figures show the number of plant and machinery operatives falling from 200,000 in the middle of 2001 to 170,000 this year. Job losses in IDA Ireland companies exceed gains by 3,000 last year and the indigenous sector is also set for a net loss.

Ms Mary Harney has forecast that we will have "fewer but better jobs" from inward investment. The question is what the inevitable losses will mean for the unemployment rate in the years ahead.

3. Rising interest rates: We have been in an era of generally falling interest rates for some years now. Next year will see this trend reversed.

The Bank of England was the first to move rates up. Some time in the first half of next year - though the timing is the subject of much debate - the Federal Reserve Board is likely to move US interest rates up from their 45-year low of 1 per cent. And the betting is that the European Central Bank will follow the trend.

As the euro zone remains relatively lacklustre, however, increases in ECB rates should be limited enough, especially if the dollar remains weak.

However, signs of rising rates will be new for many borrowers, who have benefited from a generally downward trend since the mid-1990s.

4. House prices: House prices have to stop rising some time. Indications are that prices notched up another rise of around 14 per cent last year, despite the economic slowdown, with the average house price in Dublin now topping €300,000.

The market in general is now vulnerable if the recovery does not appear on cue, and parts of the buy-to-let market in particular could see price falls. It would require luck for the rate of price increases to now ease back to more sustainable levels.

5. Events, dear boy, events. Harold Macmillan's famous phrase of how the best intentions can be thrown off course remains a salient warning. You just never know what the year will bring, with a US election due, Europe struggling to agree its future and - particularly - new terror alerts in the US.