The Confederation of British Industry (CBI) has raised its forecast for both 2013 and 2014, but warned that rebalancing away from consumption towards investment and trade is taking longer than expected.
Growth for 2013 is now predicted to be 1.2% GDP growth, up from 1.0% in the CBI's May forecast, based on indications of improved confidence across a broad range of sectors, including services, construction and manufacturing, and on a stronger-than-expected second quarter.
For the coming year, the CBI expects the economy to gather pace, forecasting 2.3% GDP growth, up from 2.0% in May, as disposable income increases and business and housing investment support domestic demand.
The Confederation predicted a return to growth in the Euro
area and said broader global recovery will give a positive boost to exports, but warned imports will also grow as the UK's domestic situation improves, so the trade contribution to growth will remain small.
John Cridland, CBI Director-General, said: "The economy has started to gain momentum and confidence is picking up, but it's still early days.
"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 government needs to get behind talented UK businesses to help them break into new export markets and sell great British products and services around the globe."
The Confederation also predicted that household spending will slowly strengthen in the second half of 2013 and through 2014, as "confidence lifts and credit conditions continue to improve".
It believes that a gradual fall back of inflation will improve spending power, which will lend support to increased household outgoings, although this is expected to happen against the backdrop of a stable labour market.
Meanwhile, buoyed by a general pick-up across the global economy and a return to growth in the Eurozone, business investment is forecast to grow by 7.3% in 2014, from -2.8% in 2013, while export growth is expected to increase from 0.7% in 2013 to 4.9% in 2014 - although the net contribution of trade to GDP growth is set to remain muted as domestic demand boosts import growth from -0.8% in 2013 to 4.4% in 2014.
The rate of unemployment is expected to be 7.8% in 2013, falling to 7.6% in 2014.
"We expect unemployment to be relatively sticky over the medium-term, as hours worked increase and productivity begins to recover," the CBI said.
"Consequently, [we] expect interest rates to remain on hold beyond 2014."
Stephen Gifford, CBI Director of Economics, added: "Increased confidence, improved credit conditions and a pick-up in disposable income should underpin consumer spending in the UK through 2014.
"As the Eurozone returns to growth and global momentum continues to build we should see a gradual increase in business investment and UK trade.
"But despite a relatively stable global environment over the last year, risks remain as financial markets move to a new regulatory environment and the Eurozone continues to evolve. Meanwhile, emerging markets are facing structural challenges, particularly as China rebalances towards domestic consumption, which indicates muted growth prospects."