Index of Production, UK: August 2015

• The data in this release are consistent with the Quarterly National Accounts published on 30 September 2015 and data used for Blue Book 2015 due for release on 30 October 2015

• Total production output is estimated to have increased by 1.9% in August 2015 compared with August 2014. There were increases in 2 of its 4 main sectors, with the largest contribution coming from mining & quarrying, which increased by 17.7%

• Manufacturing output decreased by 0.8% in August 2015 compared with August 2014. The largest contribution to the decrease came from the manufacture of machinery & equipment not elsewhere classified, which decreased by 13.0%

• Total production output is estimated to have increased by 1.0% in August 2015 compared with July 2015. There were increases in 3 of its 4 main sectors, with the largest contribution coming from mining & quarrying, which increased by 6.0%

• Manufacturing output increased by 0.5% in August 2015 compared with July 2015. The main manufacturing components contributing to the growth were the manufacture of transport equipment; the manufacture of basic metals & metal products; and the manufacture of food, beverages & tobacco

• In the 3 months to August 2015, production and manufacturing were 9.4% and 6.5% respectively below their figures reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008

• The earliest period open for revision in this release was January 1997. Revisions to Index of Production data up to and including Quarter 2 (Apr to June) 2015 are consistent with the Quarterly National Accounts publication released on 30 September 2015

This bulletin presents the monthly estimates of the Index of Production (IoP) for the UK production industries, August 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 14.9% of the output approach to the measurement of gross domestic product.

IoP values are referenced to 2012 so that the average for 2012 is equal to 100. Therefore, currently an index value of 110 would indicate that output is 10% higher than the average for 2012. 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.

This release presents:

• the most recent IoP figures

• the economic context to the IoP

• GDP impact and components

• a supplementary analysis to the IoP

• spotlight

• background notes section including an assessment of the quality of the IoP, as well as an explanation of the terms used in this bulletin

Table 1 shows the main figures for this release. Figure 1 shows the production and manufacturing series from May 2013 to August 2015.

We have developed guidelines for measuring statistical quality; these are based on 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, as with 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. Since January 2015, we have published the MBS response rates for data included in the IoP in the background methods section of the statistical bulletin. This provides further information of the percentages of turnover and returned questionnaires. We also publish MBS historical response rates back to 2010.

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 (4.6 Mb ZIP) section in the background notes.

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.

Between January and May 2015, production output increased at a moderate pace. This upward trend was reversed in June and July 2015, although the contraction in output over these 2 months was smaller than the increases observed since the beginning of the year. The latest data show that production output increased strongly between July and August 2015 and was above the level seen in May 2015. In 2015, the performance of the manufacturing industry has been more volatile than that of the Index of Production (IoP) as a whole. Alternating periods of expansion and contraction, have meant that despite a moderate increase from July to August 2015, manufacturing levels remained lower than at the start of the year (for more information and analysis of the latest figures see the production and sectors supplementary analysis section of the bulletin).

Figure 2 shows that the UK manufacturing industry grew steadily between Quarter 1 (Jan to Mar) 2002 and Quarter 1 (Jan to Mar) 2008 at a compound growth rate of 0.1% per quarter. The economic downturn impacted the industry severely, with output contracting by 12.3% between the economy’s peak in Quarter 1 (Jan to Mar) 2008 and the economy’s trough in Quarter 2 (Apr to June) 2009. Following the economic downturn in 2008 and 2009, manufacturing returned to growth for a short period, before falling again in 2011 and 2012.

Between Quarter 2 (Apr to June) 2014 and Quarter 2 (Apr to June) 2015, the index of production experienced relatively steady growth. The manufacturing industries also experienced quarter-on-quarter growth in 2014, however, it then contracted in the first 2 quarters of 2015 (for more information and analysis on the latest quarterly data see the production and sectors supplementary analysis section of the bulletin).

Headline GDP surpassed its pre-downturn peak in Quarter 2 (Apr to June) 2013, but services (which account for over 78% of total GDP) remained the only headline industry grouping to have achieved this. Output in the production and manufacturing industries still remained below levels experienced just before the onset of the downturn (according to the Quarterly National Accounts - Quarter 2 (Apr to June) 2015). This is consistent with the historical trend of services growing at a faster rate than production and manufacturing, despite the fact that productivity in the production industries, manufacturing in particular, has on average grown at a faster rate than in the service industries since 1997 (more information can be found in Labour Productivity, Quarter 2 (Apr to June) 2015). The slower output growth and increased productivity, therefore, reflect the falling share of the labour force employed in manufacturing, which fell from 16.5% to 9.8% between 1997 and 2014 (Labour Market Statistics, September 2015, reference table EMP13).

Over the past year the manufacturing industry has experienced low price inflation, 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). Input prices paid by UK manufacturers fell by 13.8% in the year to August 2015, compared with a fall of 12.6% in the year to July 2015. Output prices have also experienced deflation, falling by 1.8% in the year to August 2015, with crude oil impacting input prices. This feeds through to petroleum products, contributing to the decrease in their output prices (more information can be found in Producer Price Inflation, August 2015).

International perspective

Globally, the performance of manufacturing output has varied across the G7 nations since the onset of the economic downturn (Figure 2). Japan experienced the largest average annual fall in output during 2008 and 2009 (12.5% per annum), whereas the smallest decline was in the UK (6.1% per annum).

Following the economic downturn in 2008 and 2009, all G7 nations’ manufacturing industries returned to growth. However, almost all members experienced subsequent declines in growth between the second half of 2012 and the first half of 2013, particularly in Italy and Japan. More recently, in Quarter 2 (Apr to June) 2015, Italy and the United States experienced growth in manufacturing output while output contracted in the other G7 countries to varying degrees. The largest contractions took place in Japan at 1.5%, while France, Canada and Germany respectively contracted by 0.5%, 0.5% and 0.4%. The manufacturing output of the UK also contracted.

For most G7 countries, manufacturing output remained below their respective pre-downturn levels experienced in 2007. Output in Italy, France, Japan and Canada remained 22.6%, 15.6%, 14.1% and 7.1% below the countries’ pre-downturn levels respectively. In Quarter 2 (Apr to June) 2015, the UK and the USA were also below their respective pre-downturn levels but to a lesser extent. However, Germany was above its pre-downturn level, by 2.2% (more information can be found on the OECD website).

Figure 3 presents month on corresponding month of previous year percentage growth rates in 8 of the 13 UK manufacturing sub-industries for July 2015, alongside comparable growth rates achieved in Germany, France, Italy and the euro area. This shows that the UK manufacturing output contracted by 1.2%, compared with total euro area manufacturing growth of 1.6%. Manufacturing output decreased in Germany and France by 0.4% and 1.7% respectively, while the manufacturing output in Italy increased by 1.9%.

Figure 3 also shows that the UK’s comparable strength was concentrated in the manufacture of “chemical products”, which was offset by relative weakness in the manufacture of “machinery & equipment not else classified”.

In this release, periods back to January 1997 are open for revision, in line with the National Accounts revisions policy (41.6 Kb Pdf) and are consistent with the Quarterly National Accounts publication released on 30 September 2015.

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 available for Quarter 2 (Apr to June) 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 August 2015 will be published on 9 October 2015 and services output for the same period on 27 October 2015.

Total production

Total production output in August 2015 increased by 1.9% compared with August 2014 (Table 3). This increase reflected rises in 2 of its 4 main sectors, with mining & quarrying having the largest contribution, increasing by 17.7% and contributing 2.2 percentage points to total production. This was the largest increase since May 1994 when it rose by 23.7%. The increase in mining & quarrying was followed by an increase in water supply, sewerage & waste management output, which increased by 6.0% and contributed 0.5 percentage points to total production. These increases were partially offset by a decrease in manufacturing (the largest component in production), which decreased by 0.8% and contributed 0.5 percentage points and in electricity, gas, steam & air-conditioning output, which decreased by 3.1% and contributed 0.3 percentage points to total production (Figure 4).

Between July 2015 and August 2015, total production increased by 1.0% (Table 3). There were increases in 3 of its 4 main sectors. The largest contribution came from mining & quarrying, which increased by 6.0% and contributed 0.8 percentage points to total production. The increase in mining & quarrying was followed by increases in manufacturing, which increased by 0.5% and contributed 0.3 percentage points to total production and in electricity, gas, steam & air-conditioning output, which increased by 0.3% and had a negligible contribution to total production. Partially offsetting the increases was a decrease in water supply, sewerage & waste management output, which decreased by 2.5% and contributed 0.2 percentage points to total production (Figure 5).

Manufacturing

Manufacturing output decreased by 0.8% between August 2014 and August 2015 and contributed 0.5 percentage points to total production. Output decreased in 9 of the 13 manufacturing sub-sectors compared with a year ago (Figure 4). The manufacturing sub-sector with the largest downward contribution to total production growth was the manufacture of machinery & equipment not elsewhere classified, which decreased by 13.0%. This was the ninth consecutive decrease since November 2014 and anecdotal evidence suggested that there is a general decrease across the industry compared with a year ago.

In contrast, the manufacturing sub-sector with the largest upward contribution to total production compared with a year ago was the manufacture of transport equipment. This sub-sector increased by 10.5% and contributed 0.9 percentage points to total production. The main contributor within this sub-sector was the manufacture of motor vehicles, trailers & semi trailers, which increased by 13.6% and contributed 0.6 percentage points to total production.

Manufacturing output increased by 0.5% between July 2015 and August 2015, having decreased in July 2015 by 0.7%. There were increases in 6 of the 13 manufacturing sub-sectors (Figure 5). The manufacturing sub-sector with the largest upward contribution to total production was the manufacture of transport equipment, which increased by 4.6% and contributed 0.4 percentage points to total production. The main contributor within this sub-sector was the manufacture of motor vehicles, trailers & semi trailers, which increased by 8.8% and contributed 0.4 percentage points to total production, the largest rise since January 2014, when it rose by 9.6%. Anecdotal evidence suggested that a contributor to the increase was the effect of some earlier than usual shutdowns in the previous month.

In contrast to the above increases, the manufacturing sub-sector with the largest downward contribution to total production was other manufacturing & repair, which decreased by 2.0% and contributed 0.1 percentage points to total production. The main contributor within this sub-sector was the manufacture of furniture, which decreased by 5.3% and contributed 0.1 percentage points to total production.

Mining and quarrying

Mining & quarrying output increased by 17.7% between August 2014 and August 2015, the fifth consecutive increase since March 2015, contributing 2.2 percentage points to total production. The sub-sector with the largest upward contribution was the extraction of crude petroleum & natural gas, which increased by 25.6% and contributed 2.3 percentage points to total production (Figure 4). This was due to increases over recent months in crude oil production compared with last year, when major planned maintenance shutdowns in a number of terminals hampered production.

Mining & quarrying output increased by 6.0% in August 2015 compared with July 2015 and contributed 0.8 percentage points to total production. This followed a smaller increase of 0.7% in the previous month. The sub-sector with the largest upward contribution was the extraction of crude petroleum & natural gas, which increased by 8.7% and contributed 0.9 percentage points to total production (Figure 5).

Electricity, gas, steam & air conditioning

Electricity, gas, steam & air conditioning output decreased by 3.1% in August 2015 compared with August 2014, the third consecutive decrease and contributed 0.3 percentage points to total production (Figure 4). This reflected a decrease in 1 of its 2 sub-sectors, the manufacture of gas & distribution of gaseous fuels through mains, which decreased by 11.2% and had a downward contribution of 0.3 percentage points to total production.

Electricity, gas, steam & air conditioning output increased by 0.3% in August 2015 compared with July 2015 and had a negligible contribution to total production (Figure 5). The increase was in 1 of its 2 sub-sectors, the manufacture of gas & distribution of gaseous fuels through mains, which increased by 1.3% and had a negligible contribution to total production. This rise followed a decrease in July 2015 as a result of revised data from source (see Revisions to IoP for further details).

Water & waste management

Water supply, sewerage & waste management output increased by 6.0% in August 2015 compared with August 2014, the sixth consecutive increase and contributed 0.5 percentage points to total production. This increase reflected a rise in all of its 4 sub-sectors’ output (Figure 4), with the largest contribution coming from sewerage, which increased by 18.5% and contributed 0.4 percentage points to total production.

Water supply, sewerage & waste management output decreased by 2.5% between July 2015 and August 2015, having increased by 1.1% the previous month. This decrease reflected a fall in 3 of its 4 sub-sectors (Figure 5). The largest downward contribution came from waste collection, treatment & disposal activities, which decreased by 3.1% and contributed 0.1 percentage points to total production, having increased by 2.6% in the previous month. Anecdotal evidence suggested the industry displayed a widespread weakness, with exports highlighted as a contributing factor.

Revisions to IoP

Revisions to the Index of Production follow the National Accounts Revisions policy (41.6 Kb Pdf). 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 one indication of the reliability of this important 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 6.

In this release of data, the earliest period open for revision is January 1997, as this dataset contains the annual updates that are also included in the Quarterly National Accounts consistent with the Blue Book 2015 publication.

There are numerous sources of revision that have affected production in this bulletin, including but not limited to:

• the annual update of the weights used to construct the chained volume measures of output; these are now based on the new 2012 industry weights

• the annual update of seasonal adjustment models

• the published indices being re-referenced from 2011=100 to 2012=100

• methodological improvement

• updated source data

As is common for the first Index of Production publication following the annual updates, there are more and larger revisions than in an ordinary publication (see Table IOP5R which shows the revisions to IoP estimates against the previously published).

Further details of notable revisions to IoP data up to and including Quarter 2 (Apr to June) 2015 and the associated impact on previously published GDP estimates can be found in the Quarterly National Accounts and in the GDP output improvement report (946.2 Kb Pdf) released on 30 September 2015.

Evidence from the Department of Energy and Climate Change (DECC) suggested revisions to July in the electricity, gas, steam & air conditioning supply sector resulted from the receipt of actual data to replace estimates.

The release of Blue Book 2015 constitutes our annual update of the National Accounts. These (methodological and data) changes are designed to ensure that official statistics reflect the changing nature of the UK and global economies, to enable fair and meaningful international comparisons and to permit analysis of current economic trends on the best available data. While the scope and impact of these changes is smaller than in previous years – and notably less than in Blue Book 2014 – there are a range of important measurement developments (more information about the Blue Book changes can be found in Impact of methods changes to the National Accounts and Sector & Financial Accounts, Q1 1997 to Q2 2015).

The Blue Book 2015 revisions, which go back to January 1997, have affected the Index of Production (IoP) and its components to different extents. The main sources of the revision are the annual update of weights and seasonal adjustment models, re-referencing of the published indices from 2011 to 2012, methodological improvements and updated source data.

As is common for the first IoP publication following the annual updates, there are larger revisions than in an ordinary publication. Some of these revisions are analysed in this section of the bulletin.

The annual update of weights in Blue Book 2015 has increased the production weight within total gross value added (GVA), from 146.3 parts per thousand (ppt) to 148.9ppt. The annual change in weights has also impacted all of the components of IoP to a different extent. Table 4 shows that manufacturing is still the dominant industry within production, even with its weight decreasing from 693.6ppt in 2011 to 690.8ppt in 2012, where the IoP weight is 1000. However, mining & quarrying saw the largest decrease in weight, from 156.8ppt in 2011 to 134.6ppt in 2012, mainly driven by a decrease in the weight of extraction of crude petroleum & natural gas from 128.7ppt in 2011 to 106.5ppt in 2012. Both electricity, gas, steam & air conditioning supply and water & waste management have seen an increase in their weights by 22.5ppt and 2.5ppt, respectively. The rise in the weight of electricity, gas, steam & air conditioning supply was mainly driven by an increase in the weight of electric power generation, transmission & distribution which increased significantly from 47.4ppt in 2011 to 68.4ppt in 2012.

The Blue Book revisions to the IoP have impacted not only the weights of the IoP and its main components but their paths as well. Figure 6 shows the volume of production indexed to 100 at 2012. Prior to the downturn, the Blue Book 2015 consistent estimates of the IoP grew at broadly the same rate as the previously published data. During the economic downturn (Quarter 1 (Jan to Mar) 2008 to Quarter 2 (Apr to June) 2009) the index experienced a slightly deeper fall of 10.7% when compared with the previously published estimate of 10.6%. Since Quarter 1 (Jan to Mar) 2013, the IoP grew at a slower rate than previously published and in Quarter 2 (Apr to June) 2015 it was 9.5% below its level observed during the economy’s peak in Quarter 1 (Jan to Mar) 2008 - this compares with a previously published estimate which showed that output was 9.2% below peak levels.

Figure 8 shows that the path of manufacturing has been broadly unchanged between Quarter 1 (Jan to Mar) 1997 and Quarter 2 (Apr to June) 2012. Since Quarter 3 (July to Sep) 2012, the industry has been growing at a slower rate than previously estimated (an average compound growth rate of 0.1% per quarter compared with the previously estimated 0.2% per quarter). In Quarter 2 (Apr to June) 2015, manufacturing was still 6.0% below its peak experienced in Quarter 1 (Jan to Mar) 2008, compared with 4.8% in the previously published data.

Figure 9 shows that the profile of the electricity, gas, steam & air conditioning supply industry is broadly unchanged following the Blue Book revisions. As can be seen from the figure the growth of this industry is slightly more volatile than the other production components, reflecting relative volatility in the industry’s supply and demand.

Water & waste management has experienced relatively large revisions since 1997 due to a source data update in industry 38 (waste collection, treatment & disposal activities; materials recovery). The economic downturn (Quarter 1 (Jan to Mar) 2008 to Quarter 2 (Apr to June) 2009) affected the industry less severely than previously estimated with its output contracting by 8.9% when compared with 9.7% from the previously published estimates. Since the economic downturn the industry has followed a generally upward trend and in Quarter 2 (Apr to June) 2015 it was 7.7% above its level in Quarter 1 (Jan to Mar) 2008, which was revised up from 0.7% in the previously published data. However, pre-downturn rates of growth remain broadly unchanged.

Next month’s spotlight will look at the impact of the Blue Book changes on the manufacturing sub-industries