The British economy has transformed into a paragon of steady growth, writes Chris Johns

Many economists of my generation were brought up on books and articles that described the UK economy in terms of "Stop Go". The modern version, of course, is "boom and bust".

Nowadays, it is common if slightly mischievous to assert that the UK has been one of the developed world's most stable and successful economies since sterling was ejected from the exchange rate mechanism in 1992.

A mix of structural economic reform introduced largely under Thatcher and more recent improvements in the implementation of fiscal and monetary policy lie behind this success story.

Despite overblown fears that the housing market poses a risk of another major boom-and-bust cycle, 2004 will see yet another year of steady growth - higher than in 2003 - and low inflation.

Unemployment will remain notable by its absence; once again we take full employment for granted. In 2004 the UK economy will record its 13th year of uninterrupted growth. It will not be spectacular but it will mean the expansion remains sustainable.

The risks to this utterly benign outlook lie almost exclusively overseas. The current global upswing is at risk from an early end to the US recovery, according to some commentators. Tony Blair will keep his fingers crossed that the US economy delivers his chum George Bush a second term of office. As 2004 progresses, Mr Blair will be gearing up for his own appointment with the electorate, probably in 2005.

Rejection of Mr Bush might also be seen as a rejection of the Iraqi adventure, something that will leave Mr Blair looking isolated and vulnerable. The British Prime Minister will probably get lucky. The US election will be decided mostly by the performance of the economy where fears of the pessimists look overdone. The US and global outlook in 2004 could not provide a better picture for the small open economy that is the UK.

Mr Blair would like to resurrect the issue of sterling's entry into the single currency. He'd love Gordon Brown to deliver an upbeat assessment of the preparations for scrapping the pound but is enough of a realist to know this is unlikely. The UK is, in one sense, a victim of its own success.

Its better economic performance and, in particular, the obvious superiority of the Bank of England's techniques of monetary management have for now settled the great euro debate.

The recent collapse of the European Growth and Stability Pact has hardly helped the cause of the dwindling band of British euro enthusiasts. Even for such a europhile as Mr Blair, joining something so obviously broken would be risky in the extreme.

Paradoxically, he will have to wait for a period of UK economic under-performance, relative to Europe, before he can relaunch the euro project. He could be waiting a long time. There is an even more pragmatic reason for rejecting early entry into the single currency: the euro looks as if it has begun a long period of overvaluation against the dollar.

Interest rates will rise a bit this year, but not by as much as the financial markets expect. The Bank of England will receive some unnecessary help in its battle against price rises with a change in the inflation target. A move to the inflation measure used by the European Central Bank has been in the offing for some time and is a token gesture to getting Britain ready to join the euro.

All commentators agree the housing market looks stretched but differ over how much to worry about this. With interest rates likely to rise only a touch and unemployment set to remain low, it is hard to make the case for a collapse in house prices. The usual suspects, led by The Economist, will warn of an impending house price disaster this time next year, just as they have done for the past few years.

The year 2004 will have to be the one the government's huge expansion of public spending must begin to deliver. In one sense it already has: hospital waiting lists, on government figures, have started to shrink. The problem for Mr Blair is that nobody puts a lot of faith in what the government says and believes much of the money thrown at the public sector is being wasted.

People are focusing on value for money in the public sector and do not like what they see - or get. Mr Blair recognises this which is why he has staked so much personal political capital on reform of higher education. A failure to deliver better quality universities will be a marker for his wider public sector reforms.

Another target area for improvement is transport in all its guises. The recently announced plan for expansion of British airports, while largely a story about regulation of a private sector quasi-monopoly, is but one example.

Airports in the south-east, in particular, are already hugely overextended and travelling through Heathrow remains a squalid experience. If demand for air travel doubles or trebles over the next three decadesit is crucial to get the infrastructure right.

The UK's private sector is doing fine. Outsourcing to Asia can be achieved without a threat to overall employment levels; the competitive challenge posed by China, India and elsewhere is best handled by a flexible economy enjoying full employment. The real threats come from inadequate public sector services. The CBI's continuous complaints about creeping regulation are grounded in fact, but a little overblown.

The transformation of the British economy into a paragon of steady growth is mirrored in the stock market - steady, if unspectacular, growth is all that can be expected from UK equities but this is to be welcomed.