A report by the independent economic forecasting group the Ernst & Young Item Club that the financial situation appears to be stabilising and that there are signs credit conditions and confidence are beginning to improve makes welcome reading.

Yet behind that headline, the news is not so encouraging. The UK’s GDP is predicted to fall by 3.5% this year, unemployment to rise by a further 900,000 and any recovery is not expected to start until next spring, or the end of the year if the UK’s Chancellor’s forecast is correct.

What is positive, however, is the group’s finding that credit conditions and confidence are beginning to improve, which is essential if, as they say, any recovery is to be led by the corporate sector.

While Guernsey has been affected to a far lesser extent than other jurisdictions, there is little or no evidence yet that the domestic economy is improving. As we report today, the Confederation of Guernsey Industry is still awaiting signs that things have bottomed out.

The Item Club forecast is concerned about inflation, specifically the need to avoid deflation while the recovery takes hold and prevent inflation when it does.

For Guernsey, this is particularly important. Not for the usual reasons, but because the expectation of rampant increases in the cost of living is being touted locally as one reason why the island should borrow £175m. in order to embark on a huge spending spree.

The Item Club, however, expects rates to peak at 5.1% in 2012 with the consumer price index (which Treasury and Resources here believes is a better guide because it excludes the effects of mortgages) will hit 2% the same year.

That does not imply a runaway RPI or a figure that will make rapid inroads into a debt burden that by Guernsey standards is massive and unprecedented.

With the economic future remaining uncertain and one of the ‘benefits’ of borrowing looking similarly shaky, the enthusiasm to rely on loans remains questionable.

While borrowing should not be ruled out, what confidence can islanders have that £175m. is the minimum amount needed?