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UK economy: High confidence but decade-low living standards

Scott E Barbour | The Image Bank | Getty Images

The outlook for the UK economy is looking increasingly rosy, new data released on Friday showed, with rising consumer and business confidence and house price gains adding to hopes that the recovery is taking hold.

Consumer confidence rose to the highest level in almost four years in August, according to GfK. The increase in confidence continues a trend, with a five point rise in July and a 14 point rise over the last four months. It is the first time in three decades that the index has risen so substantially.

The data comes as the British Chambers of Commerce (BCC) raised its economic forecasts for the U.K. on Friday. It said it expected the U.K. economy to grow 1.3 percent in 2013 up from a previous forecast of 0.9 percent. Official government figures showed that the economy expanded 0.7 percent in the second quarter of 2013 from the previous quarter.

(Read more: UK economy 'needs full-blown rebalancing')

The BCC also upgraded its 2014 forecast from 1.9 percent to 2.2 percent and for 2015 upgraded its forecast by a percentage point to 2.5 percent.

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

The director general of the BCC, John Langworth, said the improved outlook was testament to the "steadfast determination shown by businesses in previous quarters, who have consistently displayed confidence in the face of unwarranted pessimism over the economy". He warned however that the recovery was "not yet secure."

Rising house prices have also been hailed as a sign that the U.K. economy is now on its way to health. Prices rose for a fourth consecutive month in August, according to mortgage lender Nationwide. The lender warned however that property prices could become stretched if demand keeps on outstripping supply.

(Read more: No bubble says Nationwide, as UK housing hits 5-year high)

Others also expressed concern that the recovery is still very fragile.

The GfK index showed that consumers' views on their own personal finances was unchanged in August from July, data which presented a "conundrum of Alice in Wonderland proportions", according to the managing director of social research at GfK.

"As more and more official figures show that we are all worse off, with U.K. living standards at their lowest for a decade, the British public's economic confidence continues to grow strongly," Nick Moon remarked.

He said the apparent paradox of rising confidence as real income falls could be put down to the "steady flow of economic good news over the past few months."

"With these figures receiving far more prominence than reports about declining real incomes, it is perhaps not surprising that people react to all this good news by declaring themselves more optimistic," he said.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

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