THE economic outlook at the start of 2004 looks a good deal brighter than it did 12 months ago. After an inauspicious start, when business and consumer confidence was undermined by the prospect of war in Iraq, 2003 turned out to be the best year for the global economy, as well as for the UK, since 2000.

The feelgood effect from the speedy conclusion of the war was augmented in the US by further reductions in interest rates and hefty tax cuts to stimulate a strong rebound that saw the economy expand by an impressive two per cent in just one quarter.

But there are still plenty of risks and uncertainties which could upset the applecart in 2004.

From a global perspective, the biggest causes for concern are the relentless weakening of the dollar and the questionable sustainability of the US recovery.

The UK is not immune from these developments, and is at risk in other ways, not least because the Government has decided to change the rules of the game.

The new inflation target announced by the Chancellor on December 10 is looser than the previous one and at the stroke of a pen, inflation is now well below the (new) target, having been slightly above the (old) target for most of 2003.

The effect of moving the inflation goalposts is to make it harder to bring the long-running consumer boom to a safe and soft landing.

The retrenchment, which has been a central feature of economic forecasts for the past three years, has yet to materialise. With interest rates still at historically low levels, slower earnings growth and last April's tax rises have been offset by higher borrowing.

The outstanding debt of households in the UK has now reached 125 per cent of disposable incomes, compared with 111 per cent a year ago.

The risk is that the longer the party goes on, the bigger the hangover.

If the UK's much-vaunted economic stability is to be maintained and the long overdue shift to more balanced growth achieved, consumers must accept the need to retrench.

Faced with only modest wage increases, a tough jobs market and gradually rising interest rates, they need to call time on borrowing and spending.