ECONOMIC growth is set to accelerate in the south in the first half of this year, it is claimed. Both business optimism and output are at their highest levels since May 2000, according to the latest BDO Business Trends Report.

It shows that UK businesses are continuing to reap the rewards of both healthy domestic demand and the improving world economy.

While inflationary pressures are slowly rising, inflation is unlikely to accelerate significantly over the next twelve months. Yet, with weak consumer spending in the run-up to Christmas, BDO Stoy Hayward predicts that the Bank of England's Monetary Policy Committee (MPC) will keep interest rates on hold this month.

With household purse strings predicted to tighten further, BDO Stoy Hayward expects interest rates to remain unchanged during the first quarter of 2004.

According to this month's poll of polls, both the BDO optimism and output indices show that, while economic growth is accelerating, the pace of development is likely to fall short of the Chancellor's optimistic growth projections of between three and 3.5 per cent in 2004.

The BDO optimism index - an indicator of GDP growth two quarters ahead - saw further improvement in December.

Kim Hayward, partner at BDO Stoy Hayward's Southampton business centre, said: "The latest poll of polls indicates that economic growth is set to return to levels not seen since 2000.

"However, Gordon Brown's latest projections seem somewhat optimistic.

"While business confidence and output are growing, consumer spending looks to be slowing, and we therefore expect the MPC to adopt a 'wait and see' approach, keeping interest rates on hold throughout the first quarter of 2004."