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UK economy 'needs full-blown rebalancing'

One of the U.K.'s top business lobbying organizations has raised its growth forecasts for the U.K. this year and next after a better-than-expected round of economic data, but warned that unemployment will be "sticky" over the medium term.


The Confederation of British Industry (CBI) on Monday forecast gross domestic product (GDP) growth of 1.2 percent in 2013, up from its May forecast of 1 percent, as the services, construction and manufacturing sectors showed signs of improvement.

(Read more: UK economy in good shape, more positive news unveiled)

In 2014, the organization said it expects the economy to gather pace, growing at a rate of 2.3 percent - up from its earlier forecast of 2.0 percent - as disposable income increases, and business and housing investment support domestic demand.

The CBI report followed upgraded growth forecasts from the Bank of England, on the back of data and business surveys suggesting the U.K.'s economy is recovering quicker than expected. The latest GDP figures revealed the economy grew by 0.6 percent in the second quarter - double the rate at the start of the year.

"The economy has started to gain momentum and confidence is picking up, but it's still early days," said CBI Director-General John Cridland.

(Read more: Services sector helps double UK's growth rate)

Oli Scarff | Getty Images

"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 CBI also forecasted that interest rates would remain low beyond 2014, as the unemployment rate will stay at 7.8 percent in 2013 before falling to 7.6 percent in 2014.

(Read More: Don't panic! UK recovery is 'firmly entrenched')

Bank of England governor Mark Carney pledged earlier this month that interest rates would remain low until unemployment in Britain dropped to 7 percent, which he predicted would not be for another three years.

"We expect unemployment to be relatively sticky over the medium-term, as hours worked increase and productivity begins to recover. Consequently, the CBI expects interest rates to remain on hold beyond 2014," the report said.

By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave

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