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This morning the ITEM Club from Ernst and Young released its winter economic forecast. This is one of the better ones. The ITEM club is hugely respected and so its view is always worth considering.

But what is interesting about its musings, is that actually it didn’t really say anything that most of us didn’t already realise. But it is good to see it all encapsulated in one report. It all makes a rather pleasant change to see a certain amount of common sense from economists. 

Well, it seems the recession is probably over, but alas the ITEM club didn’t have much cheer for us.  The recent run of expanding growth was largely down to one off factors, it says. First there was the recovery in the inventory cycle. For much of the recession, businesses were using their inventory to meet demand: To save money they ran down stock. But you can’t just live off stock forever, sooner or later it runs out, then, recession or not, you have to re-order. Well that has begun to happen.

Secondly, there was the car scrappage scheme.  That helped too.

And then there was the VAT cut. The chancellor’s decisions to cut VAT didn’t impress many people. How many of us were moved to make a purchase because the product in question carried 15 per cent instead of 17½  per cent VAT? But the fact is, the VAT cut did mean the money we were spending was stretching around 2 ½ per cent further.  So, it helped.

The big snag with these drivers of the recovery is that none of them will last.  And the ITEM club is worried about what will happen next. For that reason it is predicting a growth rate of just 1 per cent this year.

The ITEM club’s Peter Spencer said: “Today’s outlook stands in stark contrast to the optimism that characterised the approach of the millennium – an overvalued pound, little spare capacity, a lax fiscal policy and financial deregulation, which allowed for excessive borrowing and left the economy hugely exposed to the financial risks that led to its near collapse in 2008.

“In the last decade Miss Prudence morphed into Miss Rosy Scenario and ultimately Miss Disaster Scenario. Mr Brown was guilty of running a large current account deficit even as the economy peaked, leaving little leeway for fiscal policy to be relaxed to deal with the credit crunch, and helping to explain why the UK remains in recession as other countries pull out.”

So how do we get out of trouble? Well, you won’t be surprised by the remedy prescribed by Professor Spencer. Exports have got to take up the slack. He said: “It is vital the UK rejuvenates its overseas investment model and starts selling into countries such as China, where we have an exceptionally low market share compared to our leading competitors. The UK’s recovery is reliant on a roaring trade with the tiger economies.”

The truth is, there is no rocket science in the report. It is all pretty much common sense. But that is in no way meant as a criticism. The UK is in too much debt. We can no longer rely on consumer borrowing. We can no longer rely on government spending, therefore, the exporters have got to take up the baton.

Evidence of an export boom is not good. The latest trade figures were pretty uninspiring. But then don’t expect an export recovery over night. It takes time. But the cheap pound does afford the UK a massive trade advantage now and this will surely bring in dividends down the line.

Professor Spencer said “The performance of the UK labour market since the beginning of the recession is remarkable when compared with the sharp fall in output. Companies and employees have agreed to pay freezes and reduced working hours in preference to redundancies, and this has had the double benefit of restraining unemployment while keeping our skills base and productive capacity intact for the upturn.

“Employment levels have fallen by just 2.5 per cent in contrast with the US, Ireland and Spain where unemployment rates have almost doubled. Longer term, with inflation remaining relatively low, these supply side improvements hold out the promise that we could potentially return to a stable economic environment, provided that the imbalances in the UK and global economies are addressed seriously.”

The ITEM club also reckons interest rates will stay low well into next year.

The big snag with the ITEM forecast is that it relies on an expansion of world trade. It says this is expected to grow by 8 per cent this year and sees UK exports expanding by an impressive 9 per cent next and 10 per cent the year after. It would be good news if this export boom does occur, and  with the pound so cheap there has to be a good chance. But, bear in mind that the one off factors that the IEM club describe also apply to the rest of the world. From the US to China, and with Germany very much in the middle, car scrappage schemes have boosted economies. If the UK is benefiting from a turn in the inventory cycle, imagine how manufacturing based economies are benefiting from this.

And that’s the big problem. The UK has become reliant on the rest of the world buying its goods, but the prognosis for the rest of the world is unclear. Some say China is booming on the back on a bubble. Other predict a double dip recession for the US. Doubts on the sustainability of recovery in Japan and Germany are growing.

On the other hand, back in the 1930s, the UK manged quite well after withdrawing from the Gold Standard, and saw exports lift growth, even at a time of global economic crisis. So even if the global economy remains weak, the cheap pound should help. Even so it is possible to become over hopeful of an export led recovery. 

PS. There is another lesson in all this.

The UK’s real problem during the noughties was the sheer volume of money flowing in that was not used to purchase British goods and services. Instead it funded debt, and pushed up sterling.  So we suffered the double blow of plentiful credit and an expensive pound. The high value of the pound made us feel better off than perhaps was really the case, and made life all but impossible for our exporters.

So why did this happen. Why did so much money flow in? The City may have been the main cause.

It is called the Dutch Disease, after North Sea oil pushed up the value of the Duthc Guilder and made things tougher for other exporters.  During the noughties it is possible the City had a similar effect on the UK.

It is worth bearing in mind that while we are told to celebrate the City and the tax revenues it brings in and the jobs it creates, it also led to a pound that was too expensive; this in turn led to much of the UK’s problems.