The BCC has upgraded its economic forecast after a surge in consumer spending but warned that concerns over low productivity and skills remain.
The BCC said it was ramping up its UK GDP growth forecast for the next three years from 2.3 per cent to 2.6 per cent in 2015, from 2.6 per cent to 2.7 per cent in 2016 and 2.6 per cent to 2.7 per cent in 2017.
It revealed the biggest driver behind its upgrade was stronger than previously expected growth in both the UKs service sector and consumer spending.
The BCC expects the service sector to report growth of 2.8 per cent in 2015, 2.9 per cent in 2016 and 2.9 per cent in 2017. In contrast it expects the manufacturing sector to grow by 0.8 per cent in 2015, 1.9 per cent in 2016 and 2.1 per cent in 2017.
Services continue to be the key driver for economic growth, along with consumer spending. While business investment is growing well, and the most recent export figures are somewhat improved, we cannot yet say that the UKs economic recovery is as broad-based as we would like,” said John Longworth, director general of the BCC.
Securing long-term, sustainable growth will require continued action and vigilance. The Bank of England must keep interest rates low for as long as possible, and ministers must have an undivided focus on fixing the fundamentals. Unless they help businesses by addressing deficiencies in education and training, investing in the UKs inadequate infrastructure and improving access to growth finance, the upgrades to our growth forecasts may only be temporary.
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The BCC also added it expected the first increase in official interest rates to 0.75 per cent from its current 0.5 per cent to happen in the second quarter next year. This, it concluded, is likely to be followed by small 0.25 per cent increases until reaching two per cent in the fourth quarter of 2017.
Longworth added: While the UK economy has made important progress in recent years, our forecast shows that the growth rate of services will be nearly four times that of manufacturing this year, and our export performance will continue to fall short. There are also a number of external risks including the sharp slowdown in Chinas growth and continued uncertainty in the euro zone that could yet impact business confidence and performance here in the UK.
“Maintaining low interest rates will help to boost confidence and create a supportive environment for businesses in the short to medium term. Action by government to fix the fundamentals, both at the upcoming Spending Review and beyond, will help businesses to invest, export and create jobs.
David Kern, chief economist at the BCC, said: Our upgraded growth forecast shows that the UK economy is on firm footing. Low inflation has given a welcome boost to households, and our vibrant and flexible labour market continues to be a source of strength. Services output and consumer spending remain the key drivers of growth for the economy. Business investment is improving, and is forecast to grow at a steady rate.
“While the immediate outlook is positive, there are both domestic and external headwinds facing the UK economy. Low productivity, and curbing the unacceptably large fiscal and external deficits, are the biggest challenges. Job creation may also be impacted by the large increases in the minimum wage.