The UK economy's gathering momentum saw the CBI today raise its growth forecasts for 2013 and 2014, but the business group warned that Britain is still falling short of a "sustainable recovery".
The employers' body is forecasting growth of 1.2 per cent this year – above its May forecasts of 1 per cent – and a stronger 2.3 per cent advance in 2014, after a better-than-expected second quarter and a broad-based rise in confidence across services, construction and manufacturing sectors.
But efforts to rebalance the economy towards exports and investment are still struggling to get out of the starting blocks, according to the CBI's director-general John Cridland, who said trade was making a limited contribution to the recovery.
Mr Cridland added: "The economy has started to gain momentum, and confidence is picking up, but it's still early days. We need to see a full-blown rebalancing of our economy, with stronger business investment and trade, before we can call a sustainable recovery. We hope that will begin to emerge next year, as the eurozone starts growing again.
"The Government needs to get behind talented UK businesses to help them break into new export markets and sell great British products and services around the globe." The eurozone pulled out of an 18-month slump between April and June, boosting prospects for exporters, which sell 40 per cent of their goods into the market. But the latest UK growth estimates will this week show the dominance of consumer spending as a buoyant housing market – fuelled by the government's Help to Buy scheme and the Bank of England's Funding for Lending initiative – boosts confidence.
Household spending, which accounts for about 60 per cent of the economy, is poised to rise for the seventh quarter while business investment lags 20 per cent below its pre-recession peak. The consumer spending picture is set to brighten further next year as wages finally begin to catch up with easing inflation for the first time in more than five years. But the CBI predicts a further 2.8 per cent decline in business investment spending this year before it bounces back 7.3 per cent in 2014.
It also expects unemployment to remain well above the Bank of England's new 7 per cent threshold for considering an interest rate rise throughout next year as the rate lingers at 7.6 per cent. The Bank's own forecasts say unemployment will not drop to 7 per cent until 2016 although money markets are pricing in a first rate rise for early 2015.
Stephen Gifford, the CBI's economics director, said: "Increased confidence, improved credit conditions and a pick-up in disposable income should underpin consumer spending in the UK through 2014. As the eurozone returns to growth and global momentum continues to build, we should see a gradual increase in business investment and UK trade.
"But risks remain as financial markets move to a new regulatory environment and the eurozone continues to evolve. Meanwhile, emerging markets are facing structural challenges, particularly as China rebalances towards domestic consumption, which indicates muted growth prospects."