"Despite these headwinds, UK GDP for 2021 is likely to show 7% growth and market consensus estimates for 2022 showing a still-strong 5% increase."
The ONS data shows that the level of real quarterly GDP in the UK is now 2.1% below where it was before the coronavirus pandemic at the end of 2019.
In output terms, the largest contributors to this increase were from hospitality, arts and recreation and health following further easing of restrictions and reopening of the economy. However, continuing declines in retail sales and supply chain issues in the construction and manufacturing industries largely contributed to the decline.
Monthly GDP grew by 0.6% in September 2021, and follows a revised 0.2% growth in August and a 0.2% fall in July.
Shane O'Neill, head of interest rate trading at Validus Risk Management, said: “This lower-than-expected print will give the Bank of England cause for concern and partly justify their decision to not hike rates earlier this month. This print will leave the market unsure about the chances of a rate hike in December and will likely weigh on front-end rates and GBP. Slowing demand and growth was a concern for MPC members and this data print goes some way to validify that concern – attention will now turn to employment data strength. If employment data surprises to the downside, then the market could be in for another disappointment come December 16. If inflation continues to move higher but economic conditions look too delicate for a rate hike, we could be headed squarely for a stagflationary shock.”
Sarah Giarrusso, investment strategist at Tilney Smith & Williamson, commented: "The September annualised GDP figure slumped slightly from the previous month’s reading as a number of economic constraints were exacerbated. Labour shortages and supply chain disruptions remain the biggest headwinds to businesses. According to CBI survey data manufacturing businesses are being hit especially hard by the labour shortages. This data is at its highest level since 1975 with net balance of 36% of businesses reporting this as a limiting factor. Whereas services businesses are less affected with 19% reporting labour shortages limiting their business. Data from the ONS also reflects this, showing job vacancies at their highest level since their data began in 2002.
"Supply chain disruptions are lasting longer than had been expected. The same CBI survey data revealed a net balance of 64% of businesses reporting lack of material and equipment as a limiting factor. Given these constraints are a result of the global pandemic, we would expect these factors to be transitory in nature and for their effects to ease over the coming months.
"Despite these headwinds, UK GDP for 2021 is likely to show 7% growth and market consensus estimates for 2022 showing a still-strong 5% increase. Estimates from the Bank of England project that in Q1 2022 UK GDP will return to its pre-pandemic Q4 2019 level. We therefore think it unlikely the UK is heading into a stagflationary environment of low growth and high inflation in the near term."
