Evidence of growth may be too much for bears to cope with

London Briefing/Chris Johns:The biggest business surprise seen so far this year has been the strength of the US economy. The second biggest surprise has been the arrival of an economic recovery just about everywhere else.

The news here in the UK, for example, just keeps getting better and better. Latest indicators from manufacturing industries and retail sales confirm an impression of an economy steadily recovering its poise after a relatively short period of stagnation.

In fact, the UK economy is close to recording its 12th consecutive year of recession-free expansion, something that is virtually unprecedented. Even the mighty US economy hasn't managed this feat and the less said about the European experience the better.

A sobering fact for the euro enthusiasts is that we have had uninterrupted growth ever since we were booted out of the exchange rate mechanism all those years ago. Opponents of euro entry don't need thousands of pages of Treasury-inspired economic analysis of the pros and cons - they just point out that something that isn't broke doesn't need fixing.

The arrival of global economic recovery produced a curious reaction in financial markets. The equity market was first to spot the rebound with interest rate and bond markets, for once, failing to see what was happening.

For a while back in the spring, stocks were celebrating growth while bonds were fretting about the possibility that Japanese-style deflation was about to inflict the US, had already arrived in Europe and would inevitably bring the UK economy to its knees.

While equities were soaring, interest rate markets were forecasting a structural economic slump, one that would last for years. Bond market people grinned and muttered the old saw that equities predict three out of every two turning points.

Equally correctly, they also pointed out that stocks have tried to anticipate recovery at least four times in the last three years, only to be bitterly disappointed each time. But now we have had the strongest equity bounce since the bear market began in March 2000 and it has been followed by data, not least for corporate profits, that gives it room to go further. Bonds have crashed.

That argument about mimicking Japan is key to understanding why different financial markets reacted, initially, in opposite ways. Interest rate markets took their cue from the US, where the Federal Reserve almost promised to start printing money because it was so worried about deflation and economic stagnation.

Fed Governor Ben Bernanke, in particular, led the charge. Bond markets took him at his word and now realise that they were sold a pass. US monetary policy used to be talked about in terms of the "Greenspan put". This year will be remembered for the Bernanke dummy.

As ever, the UK economy is settling for a halfway position between the booming US and still-stagnant euro area. The recovery here will not be as robust as the US, not least because we didn't have as deep a slowdown.

Hence, we are probably close, if not at, the bottom for interest rates but markets are probably getting ahead of themselves with the extent to which interest rates are now forecast to rise. The Bank of England is warning in the clearest possible terms that rates are likely to rise but they will continue to warn - rather than act - for a good while yet.

The economic bears - and there are plenty of them out there - have been reduced to warning about "vulnerabilities". They didn't expect a recovery because global growth is so "unbalanced".

This manifests itself in all sorts of ways but always comes back to worrying about debt accumulation in various guises. In both the US and UK there are large external trade deficits that look unsustainable and concerns over household balance sheet deterioration.

The UK has similar problems to the US - but they are much smaller. Overall, I think the greatest threat to the UK recovery lies externally. The reason why we are recovering is largely because the world economy is getting back on track. If the global recovery stumbles, so will we.

For now, there appears little to worry about. While it is true that at some point in the future the US must rebalance its economy it seems that the famous imbalances are proving to be more sustainable than many commentators would have us believe. And that is likely to continue for a while yet. An even bigger economic surprise than the resumed growth we have seen in 2003 will be the start of a multi-year expansion. I really don't know how the pessimists would cope with that.