EY forecasts 3.1% growth for UK economy

There are two drivers central to this low-inflation recovery, the professional services firm said.

First, the labour market is boosting incomes through rising employment rather than wages, while keeping inflation low through an expanding workforce.

Second, business investment has rebounded faster than expected, generating over half of the UK’s growth over the past year and supporting rebalancing.

Peter Spencer, chief economic adviser to the EY Item Club, cautioned that uncertainties do still remain.

He said: “The eurozone crisis rumbles on, holding back exports of goods – although services exports are set to boom – and the interest rate outlook remains cloudy.

“But even uncertainty can be beneficial: the debate over the timing of the rise in interest rates will help keep the housing market in check – in turn probably holding back the rates hike itself to spring 2015.”

EY expects growth of 2.5 per cent next year, with a reasonable chance of even stronger increases as activity gathers pace.

The firm’s rosy outlook is completed by the long-awaited rebalancing of the UK economy away from its historical over-reliance on the consumer, towards business investment and ultimately exports.

Business investment is up by 10.6 per cent year-on-year, with EY forecasting that figure growing by 12.5 per cent this year followed by 9.7 per cent in 2015. “While exports have yet to come to the party, we expect this to start happening from next year,” the report said.

Despite growth in demand, business investment is still 12.5 per cent below its historical peak, while housing investment – despite increasing by 13.2 per cent in the year to the first quarter – is still 25 per cent below the peak of the market.

The report said: “So companies and households have a lot of catching up to do, and business investment needs to accelerate to keep up with output.”