Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club comments, “There are good reasons to be optimistic about exports and overseas demand. The competitive pound provides the carrot and the weak home market provides the stick. The lack of domestic growth opportunities will force exporters and other organisations to seek overseas income streams, particularly in Asia, while the weak pound makes UK output extremely competitive. The longer this situation continues the more obvious it will become that this is the way forward, both for businesses and the macroeconomy.”

However, ITEM says that an export-led recovery is really a growth story for the UK from 2011 onwards, not for this year  -- world trade is not likely to regain its 2008 peak until the end of 2011. “The immediate prospects for the economy remain dismal and we still think that the UK will struggle to achieve 1% growth this year,” Spencer says.

GDP is forecast to grow by 2.7% next year and 3.4% in 2012, powered initially by exports and then investment. However, prospects for this year remain poor, with output growth likely to be about 1%.

Today's report says Treasury forecasts for economic growth remain at odds with ITEM’s forecast. The Treasury has based its assumptions for UK economic recovery on a bounce back in home markets and consumers marching back onto the high street, rather than on exports.

Spencer comments, “We remain concerned that the Treasury’s forecast lacks precision. It is dependent upon a strong revival in domestic demand over the next two to three years, which appears unlikely in the current circumstances.”

Unlike the last recession, consumer spending power this time around is too weak to sustain a recovery. Household incomes are being badly squeezed. The consumer remains under pressure, cashed out and cautious, drowning in debt and concerned about the continued risk of unemployment.

According to the ITEM Club, household debt rose from 100% to 160% of disposable income from 2000 to 2007. While disposable incomes were boosted last year by the sharp decline in interest rates, this effect will disappear this year since interest rates cannot fall any further. With wage growth likely to remain subdued, pressures will intensify this year leaving real disposable incomes flat. ITEM expects an increase in consumer spending of just 0.5% this year.

The report says this is an economy of two halves. While households are weighed down by debt and under pressure in the labour market, UK Plc could provide a welcome fillip to the economy if corporate treasurers were to release some of the cash they have been holding onto during the recession.

When the global economy peaked back in 2008, companies were running a surplus of 6% of GDP and this went up during the recession to 8% of GDP. According to ITEM, these figures suggest that many large companies are in a strong financial position, certainly for this stage in the cycle. Spencer says that, despite the overhang of surplus capacity and an underemployed workforce, this is reason for thinking that investment could revive much earlier in this recovery than is usual.

He argues: “It is now time for those companies who are in a strong position and who have been able to save cash and pay down debt to step up to the plate. The weakness of sterling provides a plethora of profitable investment opportunities. UK Plc needs to take bold steps to finance overseas expansion as well as new export capacity in order to grow the business and provide the economy with a strong export-led revival.”

But the question is when and where will this investment take place? Prof. Spencer says it is unrealistic to suppose that any cash will be released in the near future due to the significant amount of spare capacity and labour in the economy and the climate of uncertainty caused by the pending election.

ITEM believes business investment will fall back by another 6.5% this year, after falling by more than 19% last year. However, the forecast sees this reversing sharply next year, with business investment up by 10% in 2011 and 14% in 2012.

With companies unlikely to release cash in the near future, the UK must rely on world output and trade, which have begun to recover nicely. However, this environment is going to be extremely challenging. The decade of the strong pound between 1997 and 2007 hollowed out much of the UK’s export industry and hit market share especially in Asia. Slow growth in European markets will certainly not help either.

Spencer concludes: “The next government will be negotiating uncharted waters. It is hard to find a precedent for a situation in which companies are so strong and consumers so weak. Exports provide an opportunity to steer our way out of this situation, but ultimately business must put its shoulder to the wheel. This support is likely to be delayed by the underutilisation of resources in the economy, but the charts begin to look promising for 2011 and beyond.”

Dominique Strauss-Kahn, IMF (International Monetary Fund) Managing Director, said at the World Economic Forum, in Davos, Switzerland, last January too many of the world’s leading economies are fooling themselves in believing foreign export demand will drive their recoveries from the global recession.