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Is UK trying to spend its way back to recovery?

Friday, 7 Feb 2014 | 7:58 AM ET

Britain's economy has been on the up over the last few months, with an improving employment picture and rosier growth prospects.

But the average Briton has yet to feel this in their wallets: Weekly real wages are growing far below the 2 percent inflation level at 0.9 percent. And it doesn't look like this could improve. The U.K.'s economic uptick is down to increased spending and not productivity. This could threaten the long-term prospects for the country's recovery, according to a report by a leading think tank.

"It is because the recovery so far has been driven by consumer spending rather than increased productivity, so people have spent more and have had to reduce their savings to do so, but they are not earning more," Jonathan Portes, director of NIESR, told CNBC in a phone interview.

While NIESR raised their forecast for the U.K. economy, predicting it to grow 2.5 per cent in 2014 and 2.1 per cent in 2015, productivity stagnation "poses a downside risk to the UK's medium-term prospects".

(Read more: UK economy goes from 'zero to hero' but don't expect giveaway)

The U.K.'s economy has has seen a string of good news recently. Britain posted its fastest annual growth rate since the start of the financial crisis in 2013, recording 1.9 percent growth for the year from just 0.3 percent in 2012.

Unemployment fell 7.1 percent in the three months to November, the lowest level since 2009.

Jonathan Parry | E+ | Getty Images

Real wage growth this year?

But the effect has not yet been felt by the population. However, the so-called "cost of living crisis", which the U.K.'s opposition leader Ed Miliband claims the country is in, could be starting to change, according to economists.

"When wages turn that's when the world changes," Jonathan Webb, head of FX strategy at Jefferies Bache, told CNBC in a TV interview.

The Institute for Fiscal Studies (IFS), another think tank, predicted that wage growth will outstrip inflation in just a few months' time.

Is the UK economy on the right growth path?
Liam Halligan, economics commentator at the Telegraph Media Group, and Andy Brough, fund manager at Schroders, discuss the U.K. economy and whether the economy is really sustainable.

A pick up in business investment, increasing demand, and more hiring from firms, will push real wages into higher growth in 2014, according to Martin Beck, U.K. economist at Capital Economics.

(Read more: Goldman: These are UK's two long-term weaknesses)

"Inflation will fall back this year and real wages should start growing again. Money people receive should go further," Beck told CNBC in a phone interview.

Other economists have expressed more caution over the prospect of real wage growth .

"I don't think real wages are going to return to their historic norm for at least a couple of years. We are seeing inflation still outstripping wage growth," Brenda Kelly, chief market strategist at IG, said in a phone interview.

"That being said, last year we saw wage growth hit a six-year high, so it does seem to be going in the right direction. It shows the decline of real incomes coming to an end so we may be seeing a bottom."

—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal

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