UK economy to grow at fastest rate since 2007

Britain's economy will grow at its fastest rate since 2007 this year, the British Chambers of Commerce (BCC) said, but called on policymakers to ensure the performance is not a "flash in the pan".

The business body upgraded its 2014 U.K. GDP forecast for 2014 from 3.1 percent to 3.2 percent and 2015 from 2.7 percent to 2.8 percent. But the BCC added that growth would slow in 2016 with the economy expanding 2.5 percent.

Britain is too reliant on consumer spending to fuel its GDP growth, the BCC said, adding that investment and exports need to be boosted.

"Our forecast confirms that Britain has become one of the fastest-growing developed economies. We are leading, rather than following, other major economies when it comes to short-term growth," John Longworth, director general of the BCC, said in a press release.

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"The task at hand is to ensure that the stellar 2014 growth is not a flash in the pan. We need to invest and export more, innovate, and build…Strong international trade performance is key if we are to steer away from a reliance on consumer spending."

Interest rate hike

The BCC upgrade comes amid talk of an interest rate hike in the U.K. with analysts split as to the timing of the move from historically low levels.

Good data such as falling unemployment between April and the end of June to its lowest level since late 2008, has been mixed with almost stagnant wage growth.

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This has made the task of predicting the first interest rate rise difficult. The BCC expects the move to come in the first quarter of 2015, with the benchmark rate moving from the current 0.5 percent to 0.75 percent. It will then rise by 0.25 percent, hitting 2.25 percent in the fourth quarter of 2016.

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Rising rates will dampen consumer spending however, the BCC warned.

Despite this, the labor market will continue to improve with unemployment falling from 6.4 percent in the second quarter of 2014 to 4.9 percent in the same period in2017.

Euro zone threat

The U.K.'s economy has raced ahead of its European counterparts with renewed concern over the euro zone. In the second quarter, euro zone GDP remained flat, Italy fell into recession and Germany's economy contracted.

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Continued weakness in the euro zone is a threat to the U.K.'s recovery, analysts told CNBC.

"The fact that growth in the euro zone seems to be extremely sluggish is affecting exports and preventing rebalancing and we think for now, the recovery will be domestic led," Samuel Tombs, U.K. economist at Capital Economics, said by phone.

- By CNBC's Arjun Kharpal