Stephen King: At the end of the day, we shouldn't really be over the moon, Gary

"Well, Gary, it was a game of two halves." Soccer punditry at its finest, but also an apposite description of the global economy in 2003. In the first half of the year, policy-makers had to deal with all manner of unpleasant things. Some were obviously beyond their direct control - the war in Iraq, the fear of terrorism and the Sars epidemic. Others, though, were their direct responsibility - the fear of deflation, the worry over a recessionary "double-dip" and the more nebulous concern about excessive debts.

In the second half of the year, everything changed. Deflation was put to one side to be replaced by inflation as "public enemy number one". The US and Asian economies surprised on the upside, sometimes to a dramatic degree. The dollar's earlier orderly decline threatened to become disorderly: investors began to realise that the US "strong dollar policy" didn't really mean very much after all. Towards year-end, even the sluggish European economies began to show signs of life, although that story was mostly confined to exports. To date, there has been little sign of a nascent recovery in domestically generated European economic growth.

Have we learnt anything from this roller-coaster ride? One thing is for certain: the political election cycle matters. Would the US have been quite so strong were it not for next year's election? I doubt it. Fiscal policy in the US was already very loose in 2002 but it got a whole lot looser in 2003, leaving the budget deficit heading rapidly towards 5 per cent of US GDP.

So far, the consequences of this huge increase in borrowing have not been huge - bond yields are lower now that they were at the beginning of the year, contrary to the forecasts of most economists, and perhaps only foreign exchange investors have found America's profligacy difficult to swallow.

I wonder, though, whether this apparent calm will continue indefinitely. Some commentators have argued that American policies are likely to end in inflationary tears, a return to the bad old days of the late 1960s and early 1970s. Somehow, though, I doubt it. It's certainly true that a country with excessive debt has an incentive to create inflation - because debts are reduced in real terms as inflation takes hold - but I'm not so sure that central banks really have this ability to create inflation whenever they feel like it. After all, inflation remained remarkably subdued in the US in the late-1990s when the economy was booming, so it's difficult to see why inflation should be any more of a threat today when there still appears to be plenty of spare capacity in the US economy.

No, I suspect that the lesson eventually to be learnt will be that there is "no such thing as a free lunch". Borrowing to keep growth going in the short-term may be absolutely fine from an electioneering point of view, but it doesn't necessarily help the fabric of an economy over the longer term. The US is in danger of consuming too much today - as revealed through the budget deficit, the low personal saving ratio and the huge and growing current account deficit - and will simply have to pay it back tomorrow.

It's been helped in its cause by the Asian central banks which, in an attempt to prevent their currencies from rising against the dollar, have been massively intervening in foreign exchange markets, buying up lots of US government paper and, hence, keeping US borrowing costs lower than they might otherwise have been. This is the equivalent of all those zero-finance deals on credit card balance transfers - it encourages people to borrow more, but doesn't necessarily imply that they will be able to spend without limit forever. The US clock is ticking, but we just can't be sure when the alarm will go off. When it does, though, I think it's more likely to be an excess debt hangover than an excess inflationary boom.

2003 certainly revealed that policy-makers can get growth going in the short term, but we really don't have sufficient information at this stage to be sure that this expansion has legs. One reason for this is the apparent inconsistency between the survey data - much of which has been extremely encouraging in recent months - and real life economic developments. Take a look at this week's chart, which relates survey data to events in the real world.It shows the relationship between the Institute of Supply Management (ISM) survey on US manufacturing jobs and the actual path for manufacturing jobs growth over the last 20 years or so.

Companies themselves are telling a very positive story: on the basis of past relationships, we should now be seeing a massive increase in US manufacturing jobs and also a substantial increase in capital spending in Germany. Yet the official data tell an entirely different story. Manufacturing jobs in the US are still in decline, and German capital spending is still very much in the doldrums.

I'm not for one minute suggesting that the companies themselves are telling lies, that somehow they're making up a fictional account of their activities. Rather, because companies are no longer constrained by national borders, I suspect there is an increasing distinction between what companies are up to and what these activities imply for individual economies.

So, in the case of US companies, yes, they probably are hiring additional workers. But there is no rule, no law, that says that the new jobs have to be in the US. If workers can be hired more cheaply elsewhere, then companies will probably do so. Employment growth may be coming through, but it's more likely to be in India or China than in the US itself. And, in the case of German companies, yes, they may well be investing. But investing in Germany? Why bother? Labour costs are high, labour markets are inflexible, the tax burden is onerous. Instead, German companies may be choosing to invest in other parts of the world, notably in central and Eastern Europe.

These arguments suggest the usual cyclical story may no longer be working in such a reliable fashion. Companies are feeling fitter, healthier and stronger than before, as they have struggled to reduce their cost base. In response, profits have rebounded and shareholders have become a little bit happier, seeing some of their earlier huge losses restored. Meanwhile, investment is picking up and employment is on the rise. But this is a story that perhaps has more relevance for China and India than it does for the traditional industrial heartlands of America and Europe. And, because of this, I suspect the bounce in activity seen in the second half of 2003 will not bring untold riches to everyone in the western world in 2004.

Stephen King is managing director of economics at HSBC