Output in the Construction Industry: April 2015 and New Orders Quarter 1 (Jan to Mar) 2015

June 17 2015 13:40

An error was found in table 5 of the statistical bulletin for Output and New Orders in the Construction Industry, April 2015 and Q1 2015. The error concerns the GDP quarter on same quarter a year ago growth rates that were misquoted as a result of a spreadsheet error. The implied GDP quarter on same quarter a year ago growth rates are also affected. All data regarding construction are correct, the sizes of the revisions to GDP are unaffected.

• This statistical bulletin provides users with the latest estimates of output in the construction industry for April 2015 and for new orders for quarter 1 (Jan to Mar) 2015. Output is defined as the amount charged by construction companies to customers for value of work (produced during the reporting period) excluding VAT and payments to sub-contractors

• The interim solution for the Construction Price and Cost Indices introduced to users on 8 May 2015 and published for the first time today, has been implemented in this release and replaces the existing deflators from quarter 1 (Jan to Mar) 2014. More information can be found in the additional information section of this bulletin

• In April 2015, output in the construction industry decreased by 0.8% compared with March 2015, after increasing by 1.4% in March. Repair and maintenance decreased by 4.8% while all new work increased by 1.6%

• Within the repair and maintenance (R&M) category, all work types reported decreases, notably non-housing R&M which fell by 7.2% and public housing R&M which fell by 6.2%

• Within all new work, new housing was the main contribution to the increase of 1.6% in April 2015 compared with March 2015, increasing by 5.4% with both public and private housing reporting increases

• The second estimate of gross domestic product (GDP) for quarter 1 (Jan to Mar) 2015 published on 28 May 2015 included an estimate of construction which showed a fall in output of 1.1% in quarter 1 (Jan to Mar) 2015. This estimate has been revised within this release based on the incorporation of late data, new seasonal adjustment parameters and the introduction of an interim solution for deflators. Output is now estimated to have decreased by 0.2%. This upward revision of growth of 0.9% provides an upwards revision of 0.1 percentage points (to 1 decimal place) to the growth rate of GDP

• Compared with April 2014, output in the construction industry increased by 1.5%. This is the 23rd consecutive month of year-on-year growth, however, this is the weakest year-on-year growth since November 2013

• New orders for the construction industry in quarter 1 (Jan to Mar) 2015 were estimated to have increased by 0.4% compared with quarter 4 (Oct to Dec) 2014 and by 8.0% compared with quarter 1 (Jan to Mar) 2014. There were increases in infrastructure (18.6%), private industrial (6.1%), new housing (1.2%) and all other work (0.1%) in quarter 1 (Jan to Mar) 2015

• The release for April 2015 has a revision period back to January 2014. Revisions in this release were caused by the incorporation of late data, new seasonal adjustment parameters and the introduction of an interim solution for deflators. More information on revisions can be found in the background notes and the article Impact of interim solution for construction prices, published on our guidance and methodology page

On 11 December 2014, the UK Statistics Authority announced its decision to suspend the designation of Construction Price and Cost Indices due to concerns about the quality of these deflators. As a result, the UK Statistics Authority also suspended the designation of Output and New Orders as National Statistics in respect of the Code of Practice for Official Statistics.

The Office for National Statistics (ONS) took over responsibility for the publication and development of the Construction Price and Cost Indices from the Department for Business Innovation & Skills on 1 April 2015. On 8 May 2015, ONS published an article describing the proposed interim solution for construction price and cost indices (CPCIs) to replace the statistical models that had been used in the production of chained volume measures (CVMs) for output in the construction industry since quarter 3 (July to Sept) 2014 and to provide an ongoing source of data from quarter 1 (Jan to Mar) 2015 onwards. This interim solution is used within this release for the first time. We have also launched a consultation to gather feedback from users to help us improve this methodology and understand more about how the CPCIs are used.

The change in methodology for the CPCIs results in revisions to output in the construction industry (307.9 Kb Pdf). However, users should note that this is not the sole source of revisions. The incorporation of late data and new seasonal adjustment parameters have also contributed to the revisions to output in the construction industry.

As the level of the interim solution for Output Price Indices (OPIs), estimated by the implied deflator in Figure 2 , is lower than that previously provided or statistically modelled, the level of output in the construction industry after deflation is higher than that previously published.

The change to growth rates is shown in table 1.

The table shows that the impact of the interim solution on quarterly growth rates is less than for the annual growth rates. However, these revisions are not solely the result of the new deflators. New seasonal adjustment parameters and the incorporation of late data have also played a part. Table 2 provides the percentage point contribution from these 3 sources to the total revision to both quarterly and annual growth rates.

About this release

Construction output estimates are a short-term indicator of construction output by the private sector and public corporations within Great Britain and are produced from a monthly survey of 8,000 businesses in Great Britain. The estimates are produced and published at current prices (including inflationary price effects) and at chained volume estimates (with inflationary effects removed) both seasonally adjusted and non-seasonally adjusted.

Detailed estimates along with a longer run of time series data are available to download in the Output in the Construction Industry, April 2015 reference tables. In these tables, users will find chained volume estimates back to quarter 1 (Jan to Mar) 1997 and monthly estimates back to January 2010. Current price non-seasonally adjusted data are available back to quarter 1 (Jan to Mar) 1955. More information on these statistics can be found in the “definitions and explanations” section in the background notes.

New orders in the construction industry estimates are a short-term indicator of construction contracts for new construction work awarded to main contractors by clients in both the public and private sectors within the UK. The estimates are produced and published both seasonally and non-seasonally adjusted at current prices (including inflationary price effects) and at constant prices (with inflationary effects removed). Since quarter 2 (Apr to Jun) 2013 these data have been supplied by Barbour ABI. Further details can be found in the background notes section of this bulletin.

Detailed estimates on new orders are available to download in the New Orders in the Construction Industry, quarter 1 (Jan to Mar) 2015 reference tables. In these tables, users will find volume estimates back to quarter 1 (Jan to Mar) 1964, current price data are also available for this time period. Value data is available for a more granular level of type of work back to quarter 1 (Jan to Mar) 1985 along with regional data for the main types of work.

The quality of the estimate of output in the construction industry

Output in the Construction industry estimates are produced from the monthly business survey on the second Friday of the month, 2 months after the reporting month. Revised results, for previously published periods, are published in line with the national accounts revisions policy. More information about the data content for this release can be found in the background notes. Revisions are an inevitable consequence of the trade-off between timeliness and accuracy. The response rate in April 2015 was 71.0% of questionnaires, accounting for 76.2% of registered turnover in the construction industry. Therefore the estimate is subject to revisions as more data become available.

The monthly output in the construction industry time series now spans 64 months, however, users should note that 60 months is the minimum time span recommended for seasonal adjustment. While the seasonal pattern is generally established after 60 months in a monthly time series, there is still potential for increased revisions until the seasonal pattern has matured.

All estimates, by definition, are subject to statistical uncertainty and for many well-established statistics we measure and publish the sampling error associated with the estimate, using this as an indicator of accuracy. For construction output we publish sample and non-sample errors in table 11 of the main reference tables. It should be noted that we are continually working on methodological changes to improve the accuracy of the construction output estimates, progress on these can be found on the ONS continuous improvement page on our website.

Construction output fell by 0.8% in April 2015 following an increase of 1.4% in March 2015. The volatility of monthly construction output growth in March and April is due to the repair and maintenance component. The annual growth rate, 1.5% in the year to April 2015 provides a longer-term indication of the performance of the construction industry. This reflects an easing of growth from a recent peak of 11.2% in December 2014 and is consistent with the Bank of England’s indicators which reflect that construction output growth remains fairly robust.

On an annual basis, new work grew by 4.3% whereas repair and maintenance acted as a drag on the level of construction output. Within new work, the main driver was private housing which grew by 16.6% although the Bank of England's Agents’ Summary of Business Conditions reported in April that house building growth had slowed from a year ago. Within the other sub-components of new work, infrastructure grew strongly by 9.6% and construction of industrial buildings also increased. The Agents reported that commercial construction continues to grow overall but remains patchy. For repair and maintenance, both the housing and the non-housing components fell.

On a monthly basis, construction output fell, also due to a decline in repair and maintenance. This fall was driven by the non-housing category which contracted by 7.2%, partly reversing an increase in March of a similar magnitude. However, construction output was supported by all new work which grew by 1.6%. The strongest sub-category of all new work was housing which grew by 5.3% in April 2015, supported by both the public and private sector. The agents noted that there had been a pickup of affordable housing completions ahead of the end of the Homes & Communities Agency grant period, and that there were reports of a gradual increase in house building amongst small builders.

The strength in housing output may partly be driven by rising house prices and strong mortgage approvals. The ONS House Price Index (HPI) showed that UK house prices increased by 9.6% in the year to March 2015, and mortgage approvals for house purchase increased by 8.0% in April 2015 compared to a year earlier. Despite the robust annual and monthly growth of housing output, the agents noted that the picture for house building output was mixed, partly because funding for construction and property firms had remained tighter than for other firms.

External indicators reflect a similarly mixed picture for construction output growth, consistent with this month’s construction data. The agents noted that although construction output continued to grow on a year earlier, the pace of growth had eased. The agents observed that this was because firms were prioritising growing margins rather than output. Firms also faced constraints arising from skill shortages and rising build costs.

However, new orders grew by 0.4% in quarter 1 (Jan to Mar) 2015 following a 1.8% decline in quarter 4 (Oct to Nov) 2014. The strongest components were private housing which increased by 2.0% and infrastructure which increased by 18.6%. The Agents highlighted that there were strong pipelines of work for infrastructure. Private industrial new orders were also robust, growing by 6.1%. On an annual basis, new orders grew by 7.9% in quarter 1 (Jan to Mar) 2015, driven by the same components as on a quarterly basis. In contrast, public housing exerted substantial downward pressure on new orders in quarter 1 (Jan to Mar) 2015.

All work

In April 2015 all work:

• decreased by 0.8% compared with March 2015

• increased by 1.5% compared with April 2014

Figure 3 shows the two main components of all work. The chart shows that the fall of 0.8% into April 2015 was caused by repair and maintenance which fell by 4.8% compared with March 2015. This was partially offset by all new work which increased by 1.6%.

Figure 4 shows the components that make up all new work. The chart shows that new housing and other new work reported increases in April 2015 while there was a decrease in infrastructure. Total new housing showed the largest increase of 5.4% and is the largest month-on-month increase since January 2014 when it increased by 5.8%. The level of total housing at £2.5 billion is the highest since the monthly series began in January 2010.

Figure 5 looks at the main components of repair and maintenance. In April 2015, all repair and maintenance fell by 4.8%, of which the main contributor was non-housing repair and maintenance, which fell by 7.2% when compared with March 2015. This is the largest month-on-month fall since December 2012.

Summary of growth rates for all work types

Table 4 provides a summary of growth rates across the different types of construction work in April 2015. Some main points from this table are as follows:

• All work types except public new housing, private new housing, public other new work and private industrial work saw a fall month-on-month. The main contribution to the fall was repair and maintenance

• The month-on-month decrease in repair and maintenance was due to a fall in all sub-sectors. Non-housing repair and maintenance reported the largest decrease

• Year-on-year the increase in all work was due all new work. All work types within all new work except public other new work and private commercial reported increases

International perspective

Output in the construction industry follows the Eurostat Short Term Statistics (STS) regulation for production in construction. Before any comparisons are made with the Euro area or EU28, it is worth noting that the UK is the only Member State to follow the A method for compiling production in construction statistics.

The latest release of production in construction showed that construction output in the euro area (EA19) increased by 0.8% in March 2015 and by 1.5% in the EU28 compared with February 2015. The GB estimate for March 2015 showed that construction output increased 1.4%. It should be noted that an accurate comparison cannot be made as Eurostat data are calculated on a 2010 = 100 basis, while GB data are calculated on a 2011 = 100 basis.

Outside of the EU, the US Census Bureau release Value of construction put in place showed provisional estimates of construction output increased by 2.2% in April 2015 compared with March 2015 and increased by 4.8% compared with April 2014.

Output in the construction industry acts as a data source for GDP when measured from the output approach and has a weight of 6.4%. A change in output in the construction industry of +/ - 0.8 percentage points will thus revise GDP by +/- 0.0512 percentage points and thus with all other components being equal a revision to GDP of +/-0.1 percentage points.

The revisions to GDP as a result of the introduction of this interim solution are shown in table 5.

Table 6 shows the latest monthly and revised quarterly output figures that fed into the second estimate of GDP release for quarter 1 (Jan to Mar) 2015 published on the 28 May 2015.

The second estimate of GDP published on 28 May 2015 contained an estimate for quarterly construction of a fall of 1.1%. This estimate has been revised within this release based on updated survey responses and is now estimated to be a fall of 0.2%. This revision of 0.9% provides an upwards revision to GDP growth of 0.1 percentage points.

Users should note that there is a time lag between how long an order turns into output (if at all) and therefore an assumption that improved new orders data will result in an improved output picture is a difficult assumption to make.

It is estimated that the seasonally adjusted volume of all new orders increased by 0.4% between quarter 1 (Jan to Mar) 2015, and quarter 4 (Oct to Dec) 2014 to £12.4 billion. There were increases in the volume of new orders for infrastructure, private industrial, private new housing, private commercial and all other work. Public other new work and public new housing showed decreases in the volume of new orders.

The volume of new orders in new housing increased by 1.2% between quarter 1 (Jan to Mar) 2015 and quarter 4 (Oct to Dec) 2014, with private new housing the main contributor, increasing by 2.0%. This was offset by a fall in public new housing of 6.3%. While public new housing accounts for only 8% of total housing, the level of new orders of £0.3 billion, was the lowest level on record.

The volume of new orders in infrastructure increased by 18.6% in quarter 1 (Jan to Mar) 2015 compared with quarter 4 (Oct to Dec) 2014 and by 68.8% compared with quarter 1 (Jan to Mar) 2014. It should be noted that infrastructure is a volatile series due to the range of products such as electricity, gas, road, rail etc included within this type of work, therefore movements of this magnitude are not unusual.

Users should note that these New Orders statistics use data from Barbour ABI and are therefore produced using different methods from those in place at the time when the statistics were first assessed for compliance with the Code of Practice for Official Statistics. They are currently being reassessed as part of an ongoing assessment of our short-term economic output indicators, with a view to confirming their designation as National Statistics. Further details on the collaboration between the ONS and Barbour ABI can be found in the background notes section of this bulletin.

Further users should note that there may be some discontinuity in the data around quarter 3 (July to Sept) 2013 where the Barbour data were used for the first time to compile these statistics.