Index of Production, UK: May 2015

July 7 2015 13:00

An error was found in the Economic context section of the statistical bulletin for Index of Production, May 2015. The error concerns text explaining the other components of GDP for Quarter 1 (Jan to Mar) 2015, whereby construction was misquoted as a second successive quarter of decline. The output in construction was the first quarter of decline. All data regarding construction and Index of Production are correct, and the sizes of the revisions to GDP are unaffected.

• Total production output is estimated to have increased by 2.1% in May 2015 compared with May 2014. There were increases in 3 of the 4 main sectors, with the largest contribution coming from mining & quarrying, which increased by 7.3%
• Manufacturing output increased by 1.0% in May 2015 compared with May 2014. The largest contribution to the increase came from the manufacture of transport equipment, which increased by 11.0%, due to a rise in the manufacture of air & spacecraft and related machinery
• Total production is estimated to have increased by 0.4% in May 2015 compared with April 2015. There were increases in 3 of the 4 main sectors, with the largest contribution coming from mining & quarrying, which increased by 4.9%
• Manufacturing output decreased by 0.6% in May 2015 compared with April 2015. The largest contribution to the decrease in manufacturing came from basic metals & metal products, which decreased by 3.7%
• In the 3 months to May 2015, production and manufacturing were 9.2% and 4.6% respectively below their figures reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008
• In this release, the earliest period open for revision was April 2015, in line with the National Accounts revisions policy. There was no impact on previously published GDP estimates resulting from revisions to this period

This bulletin presents the monthly estimates of the Index of Production (IoP) for the United Kingdom production industries, May 2015. The IoP is one of the earliest indicators of growth and it measures output in the manufacturing (the largest component of production), mining & quarrying, energy supply and water supply & waste management industries. The production industries account for 14.6% of the output approach to the measurement of gross domestic product.

IoP values are referenced to 2011 so that the average for 2011 is equal to 100. Therefore, currently an index value of 110 would indicate that output is 10% higher than the average for 2011. The index estimates are mainly based on a monthly business survey (MBS) of approximately 6,000 businesses, covering all the territory of the UK without geographical breakdown. The total IoP estimate and various breakdowns are widely used in private and public sector institutions. Care should be taken when using the month-on-month growth rates due to their volatility. All figures contained within this release are seasonally adjusted estimates, unless otherwise stated.

Table 1 shows the main figures for this release. Figure 1 shows the production and manufacturing series from February 2013 to May 2015. This release also presents the economic context to the IoP; GDP impact and components; a supplementary analysis to the IoP; industry spotlight; and a background notes section for an assessment of the quality of the IoP, as well as an explanation of the terms used in this bulletin.

We have developed guidelines for measuring statistical quality (1.22 Mb Pdf); these are based upon the 5 European Statistical System (ESS) quality dimensions. The IoP in its current form adheres to these requirements. One important dimension for measuring statistical quality is accuracy. That is, the extent to which the estimate measures the underlying "true" value of the output growth (of the production industries) in the UK for a particular period. Although the IoP meets its legal requirements for statistical accuracy, still as in all survey-based estimates, by definition, its estimates are subject to statistical uncertainty or errors. These errors consist of 2 main elements; the sampling error and the non-sampling error.

For many well-established statistics we measure and publish the sampling error associated with the estimate, using this as an indicator of accuracy. The IoP however, is constructed from a variety of data sources, some of which are not based on random samples. As a result, we currently do not publish a measure of the sampling error associated with the IoP underlying data, mainly the monthly business survey (MBS). However, research is currently under way to attempt to measure the standard error and the results of this will be published on completion.

Non-sampling errors are not easy to quantify but can be caused by coverage issues, measurement, processing and non-response. The response rate gives an indication of the likely impact of non-response error on the survey estimates. From January 2015, the MBS response rates for data included in the IoP publication were published in the background methods section of the statistical bulletin. This is to give further information of the percentages of the amount of turnover and questionnaire forms returned. We publish MBS historical response rates back to 2010 (34 Kb Excel sheet).

A further dimension of measuring accuracy is reliability, which can be measured using evidence from analyses of revisions to assess the closeness of early estimates to subsequent estimated values. Revisions are an inevitable consequence of the trade-off between timeliness and accuracy. Figures for the most recent months are provisional and subject to revision in light of:

• late responses to surveys and administrative sources

• forecasts being replaced by actual data

• revisions to seasonal adjustment factors, which are re-estimated every month and reviewed annually

Revisions to the IoP are typically small (around 0.1 to 0.2 percentage points), with the frequency of upward and downward revisions broadly equal.

Further information on the most recent revisions analysis can be found in the revisions to IoP section and in the revision triangles (4.43 Mb ZIP) section in the bulletin background note.

It should be noted that care should be taken when using the month-on-month growth rates, due to their volatility. Further information on the latest quality and methodology information (QMI) for the IoP can be found in the QMI paper. Furthermore, the IoP is constantly being reviewed and improved for accuracy and uncertainty as part of the GDP(O) improvement project; further details of improvements are published each year as part of a suite of Blue Book articles. A full list of the GDP(O) improvement project articles can be found on the Improvements page of our website.

Figure 2 shows that the pace of growth in manufacturing exceeded that of total production between 2003 and 2006. This trend was, however, temporarily interrupted following the economic downturn in 2008, when manufacturing fell by a greater extent than total production.

Following the 2008 to 2009 downturn, total production and manufacturing returned to growth for a short period, before falling again in 2011 and 2012. This coincided with falling gross domestic product (GDP) in the euro area. Total production was particularly affected, falling below its downturn trough in Quarter 4 (Oct to Dec) 2012, while manufacturing fell by a smaller amount.

For production and manufacturing, conditions have improved since the start of 2015. The Quarterly National Accounts reported that GDP rose by 0.4% in Quarter 1 (Jan to Mar) 2015, marking a ninth consecutive quarter of expansion, mainly due to the services industries which grew by 0.4% on the quarter. Looking at the other components of GDP, agriculture experienced a marked 2.3% contraction in output, while construction fell by 0.2%.

The production industry continued to show growth on an annual basis. Output was 1.0% higher in Quarter 1 (Jan to Mar) 2015 compared with Quarter 1 (Jan to Mar) 2014, with manufacturing 1.4% higher, however, this represents the weakest quarter-on-same quarter of the previous year growths since Quarter 3 (July to Sep) 2013 and Quarter 4 (Oct to Dec) 2013 respectively.

According to the Quarterly National Accounts, headline GDP surpassed its pre-downturn peak in Quarter 3 (July to Sep) 2013 and in Quarter 1 (Jan to Mar) 2015, services (which account for over 78% of total GDP) remained the only headline industry grouping to have done so. Output in the production and manufacturing industries in Quarter 1 (Jan to Mar) 2015 remained below levels experienced just before the onset of the downturn, by 9.8% and 4.5% respectively (according to the Quarterly National Accounts). Construction output has performed more favourably compared with these industries; however, output still remained 3.2% below pre-downturn levels.

The recent period of rising manufacturing output has coincided with low price inflation in the manufacturing industry, both in terms of the prices manufacturers pay for materials and fuels used in the production process (input prices) and the prices they charge for the goods they produce (output prices). We publish both measures in the Producer Price Inflation bulletin. Input prices marked their 19th successive month of deflation in the year to May 2015, with prices falling by 12.0%, down from a fall of 11.0% in the year to April 2015. Output prices have also experienced deflation, falling by 1.6% on an annual basis.

International perspective

Globally, the performance of manufacturing output has varied across G7 nations since the onset of the economic downturn (Figure 3). Japan experienced the largest average annual fall in output over 2008 and 2009 (12.5% per annum), whereas the smallest decline was in the UK (6.1% per annum).

Following the 2008 to 2009 economic downturn, all [G7 nations’ manufacturing industries][3] returned to growth. However, except for the USA, all members experienced further declines between the second half of 2012 and the first half of 2013, particularly in Italy and Japan. More recently, in Quarter 1 (Jan to Mar) 2015, France, Germany, Italy, Japan and the UK experienced growth in manufacturing output, although this has been to varying degrees. Japan experienced the strongest growth on a quarterly basis (1.6%), France and Germany grew by 0.9% and 0.5% respectively, while growth was relatively modest in Italy and the UK. Canada and the USA both experienced a decline in manufacturing output, the former by a marked 1.2%.

For most member states, manufacturing output remained below their respective pre-downturn levels experienced in 2007. Output in Italy, France and Japan remained a marked 23.3%, 15.3% and 12.7% below respective pre-downturn levels. However, in Quarter 3 (July to Sep) 2014, the USA did surpass its pre-downturn level and exceeded it by 1.2% in Quarter 1 (Jan to Mar) 2015, while Germany was also above its respective pre-downturn level, by 2.6%.

Figure 4 presents month-on-same month of the previous year percentage growth rates in 8 of the 13 UK manufacturing sub-industries for April 2015, alongside comparable growth rates achieved in Germany, France, Italy and the euro area. This shows that the UK experienced slower manufacturing growth at 0.1%, compared to total euro area manufacturing growth of 0.08%. Manufacturing output fell in France by 0.4%, while Germany and Italy both experienced rising output over the same period.

Figure 4 shows that the UK's comparable strength is currently concentrated in manufacture of chemical products; partially offset by relative weakness in the manufacturing of coke & refined petroleum products, as well as machinery & equipment not elsewhere classified. The latter includes general purpose machinery such as engines, turbines, pumps, compressors and gears among other products.

[3]: http://stats.oecd.org/index.aspx?queryid=90 "G7 nations manufacturing industries!

In this release, the earliest period open for revision was April 2015, in line with the National Accounts revisions policy (41.6 Kb Pdf).

The estimates for the production industries are generally the first of the main components for the output approach to the measurement of GDP to be published (agriculture, construction and services are the other components). All the components are already available for Quarter 1 (Jan to Mar) 2015. Details of the data already published can be found in Table 2. The Retail Sales Index reported in Table 2 is not a direct component of the output approach to measuring GDP. It does, however, feed into estimates of GDP in 2 ways. Firstly, it feeds into the services industries when GDP is measured from the output approach. Secondly, it is a data source used to measure household final consumption expenditure which feeds into GDP estimates when measured from the expenditure approach.

Output in the construction industry for May 2015 will be published on 10 July 2015 and services output for the same period on 28 July 2015.

Total production

Total production output in May 2015 increased by 2.1% compared with May 2014 (Table 3). This is the highest increase compared with a year ago since April 2014, when output increased by 3.0%. This increase reflected rises in 3 of its 4 main sectors with mining & quarrying, having the largest contribution, increasing by 7.3% and contributing 1.0 percentage points to total production. There were also increases in manufacturing of 1.0% and in water supply, sewerage & waste management of 4.6%. In contrast, electricity, gas, steam & air conditioning decreased by 0.5%, with a negligible contribution to total production.

Between April 2015 and May 2015, total production increased by 0.4% (Table 3). There were increases in 3 of its 4 main sectors. The largest upward contribution came from mining & quarrying, which increased by 4.9% and contributed 0.7 percentage points to total production. Partially offsetting the increases was a decrease in manufacturing, which decreased by 0.6% and had a downward contribution of 0.4 percentage points to total production.

Manufacturing

Manufacturing output increased by 1.0% between May 2014 and May 2015 and contributed 0.7 percentage points to total production growth. Output increased in 6 of the 13 manufacturing sub-sectors compared with a year ago (Figure 5). The manufacturing sub-sector with the largest upward contribution to total production growth was the manufacture of transport equipment, which increased by 11.0% and contributed 1.3 percentage points. The main contributor within this sub-sector was the manufacture of air, spacecraft and related machinery, which increased by 19.7% and contributed 0.9 percentage points to total production. This is mainly a contract-driven industry and anecdotal evidence suggested that increased exports were a contributing factor compared with a year ago.

In contrast, the manufacturing sub-sector with the largest downward contribution to total production compared with a year ago was the manufacture of machinery & equipment not elsewhere classified, which decreased by 14.6% and contributed 0.8 percentage points to total production. This was the eighth consecutive decrease compared with a year ago and weakness in the global market and a decrease in exports were cited as possible contributing factors compared with a year ago.

Manufacturing output decreased by 0.6% between April 2015 and May 2015, having decreased by 0.4% the previous month. There were decreases in 8 of the 13 manufacturing sub-sectors (Figure 6). The manufacturing sub-sector with the largest contribution to the decrease in total production was the manufacture of basic metals & metal products, which decreased by 3.7% and had a downward contribution of 0.3 percentage points to total production. This weakness followed a slight increase in output of 0.3% in the previous month. The main contributor within this sub-sector was the manufacture of weapons and ammunition, which decreased by 21.5%, following an increase of 3.8% in the previous month. This industry is contract-based, hence monthly volatility is expected.

In contrast to the above decreases, the manufacturing sub-sector with the largest upward contribution to total production was basic pharmaceutical products & pharmaceutical preparations, which increased by 7.9% and contributed 0.4 percentage points to total production, having decreased by 6.6% in the previous month. Anecdotal evidence suggested strong export sales were a contributing factor to the strength in this industry.

Mining & quarrying

Mining & quarrying output increased by 7.3% between May 2014 and May 2015 and contributed 1.0 percentage points to total production. The sub-sector with the largest upward contribution was the extraction of crude petroleum & natural gas, which increased by 12.8% and contributed 1.3 percentage points to total production (Figure 5). This increase compared with a year ago was the highest since September 2013, when output increased by 13.7%.

Mining & quarrying output increased by 4.9% in May 2015 compared with April 2015 and contributed 0.7 percentage points to total production. This was the third consecutive monthly increase. The sub-sector with the largest upward contribution was the extraction of crude petroleum & natural gas, which increased by 7.3% and contributed 0.8 percentage points to total production (Figure 6). This was also the third consecutive increase and the highest monthly growth since February 2014, when output increased by 10.5%. This was due to increases in crude oil production, gas and NGL (natural gas liquids) from offshore pipelines and offshore loaders in some of the North Sea terminals. Evidence from the Department of Energy and Climate Change (DECC) suggested the recent tax incentive announced in the March budget could be a contributing factor.

Electricity, gas, steam & air conditioning

Electricity, gas, steam & air conditioning output decreased by 0.5% in May 2015 compared with May 2014 and had a negligible contribution to total production (Figure 5). This reflected a decrease in 1 of its 2 sub-sectors, electric power generation, transmission & distribution, which decreased by 2.6% and had a downward contribution of 0.1 percentage points to total production. Anecdotal evidence suggested a fall in demand and a reduction in exports were contributing factors.

Electricity, gas, steam & air conditioning output increased by 0.6% in May 2015 compared with April 2015 and had a negligible contribution to total production (Figure 6), having had a decrease of 3.3% in the previous month. The increase was in 1 of its 2 sub-sectors, the manufacture of gas & distribution of gaseous fuels through mains, which increased by 3.0% and contributed 0.1 percentage points to total production. The monthly increase in this sub-sector followed a decrease of 5.9% in the previous month. Anecdotal evidence suggested a reduction in demand for domestic space heating and an increase in gas used for electricity generation could be contributing factors.

Water & waste management

Water supply, sewerage & waste management output increased by 4.6% in May 2015 compared with May 2014 and contributed 0.4 percentage points to total production. This increase reflected a rise in 3 of its 4 sub-sectors (Figure 5), with the largest upward contribution coming from waste collection, treatment & disposal activities, which increased by 6.6%, the fourth consecutive increase, and contributed 0.2 percentage points to total production.

Water supply, sewerage & waste management output increased by 0.8% between April 2015 and May 2015, the fifth consecutive increase since December 2014. This increase reflected a rise in 1 of its 4 sub-sectors (Figure 6), with the largest contribution coming from sewerage, which increased by 4.5% and contributed 0.1 percentage points to total production.

Revisions to IoP

Revisions to the Index of Production follow the National Accounts Revisions policy. Revisions are caused by a number of factors including, but not limited to revisions to source data due to late responses to the monthly business survey (MBS), actual data replacing forecast data and revisions to seasonal factors that are re-estimated every period. We produce revisions triangles of production and manufacturing growth to provide users with an indication of the reliability of this key indicator. Statistical tests are performed on the average revision to test if it is statistically significantly different from zero. Further information can be found in background note 5.

In this release of data, the earliest period open for revision was April 2015. The month-on-month growth rate for IoP in April 2015 was revised downwards by 0.1%. Further details on the revisions to IoP components can be found in the IoP5R tables, located within the data section of this release.

Industry CH covers “basic metals and metal products” in the Index of Production data and accounts for around 10.6% of manufacturing output. According to the Standard Industrial Classification (SIC07), industry CH includes the manufacture of basic metals (division 24), which covers the activities of basic iron and steel, and other basic metals and castings. The industry also includes the “manufacture of fabricated metal products except machinery and equipment” (division 25), which consists of “fabricated metal products” and “weapons & ammunition”. Division 24 and Division 25 account for 20% and 80% of the total industry respectively.

Industry CH currently produces a markedly lower level of output compared to its peak level seen in Quarter 3 (July to Sep) 1973. A historical look at the “basic metals and metal products” industry shows a downward trend in contrast to the upward trend observed in total manufacturing (Figure 7). Industry CH experienced strong growth from Quarter 1 (Jan to Mar) 1972 to its peak in Quarter 3 (July to Sep) 1973, rising at an average rate of 3.5% per quarter. However, output in the industry then started following a downward trend before falling by 24.0% between Quarter 1 (Jan to Mar) 2008 and Quarter 3 (July to Sep) 2009. The subsequent recovery has been erratic and output remains 12.8% below Quarter 1 (Jan to Mar) 2008 levels.

The manufacture of basic metals and the manufacture of fabricated products except machinery and equipment are currently below the peak levels experienced before the downturn. The quarterly paths of Divisions 24 and 25 since Quarter 1 (Jan to Mar) 1997 have been following a downward trend, which is more pronounced for Division 24 (Figure 8). Divisions 24 and 25 were strongly affected during the downturn, with output contracting by 26.3% and 23.3% respectively between Quarter 1 (Jan to Mar) 2008 and Quarter 3 (July to Sep) 2009. The contraction of Division 24 over this period was sharper followed by a quicker but more volatile recovery than the one seen in Industry 25. Despite the erratic recovery, both divisions remain below their Quarter 1 (Jan to Mar) 2008 level, by 21.3% and 10.7% respectively.