Index of Production, UK: April 2016

Total production output is estimated to have increased by 1.6% in April 2016 compared with April 2015. There were increases in all 4 main sectors, with the largest contribution coming from manufacturing (the largest component of production), which increased by 0.8%.

The largest contribution to the increase in manufacturing came from the manufacture of basic pharmaceutical products & pharmaceutical preparations, which increased by 12.5%, the largest rise since April 2009.

Total production output is estimated to have increased by 2.0% in April 2016 compared with March 2016. There were increases in 3 of the 4 main sectors, with the largest contribution coming from manufacturing, which increased by 2.3%, the largest rise since July 2012.

The largest contribution to the increase in manufacturing came from the manufacture of basic pharmaceutical products & pharmaceutical preparations, which increased by 8.6%, the largest rise since February 2014.

In the 3 months to April 2016, production and manufacturing were 9.4% and 6.4% respectively below their level reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.

There is no impact on previously published estimates as no previous periods were open for revision. This is in line with the standard revisions policy for National Accounts.

This bulletin presents the monthly estimates of the Index of Production (IoP) for the UK production industries, April 2016. 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, 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 chained volume 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 January 2014 to April 2016.

We have developed guidelines for measuring statistical quality; 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, 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 have been published in the background notes "methods" section of the statistical bulletin. This is to give further information on the percentages of the amount of turnover and questionnaire forms returned. We 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 section in the bulletin background note.

Note 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 report. 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.

Production output grew in April 2016, following growth in March and a contraction in February 2016. Overall, the level of production in the latest month is 1.6% higher than the level in April 2015 and 2.5% above its level in April 2014. Moreover, in the latest quarter (Quarter 1 (Jan to Mar) 2016) production output contracted for a second consecutive quarter but remains 0.1% above its level in Quarter 1 (Jan to Mar) 2015.

Throughout the previous 12 months, manufacturing – the largest component of production – experienced alternating periods of expansion and contraction which have resulted in current manufacturing levels being 0.8% higher than those recorded in April 2015. For more information and analysis of the latest figures see the production and sectors supplementary analysis section of the bulletin.

Looking over a longer-term period – from Quarter 2 (Apr to June) 1997 to Quarter 1 (Jan to Mar) 2016 – production and its main components have followed very different paths (Figure 2). Over this period, the electricity, gas, steam & air conditioning and water supply, sewerage & waste management sectors grew at compound average growth rates of 0.2% and 0.5% per quarter respectively, while production as a whole contracted at a compound average growth rate of 0.1% per quarter. Over the same period, manufacturing and mining & quarrying contracted at compound average growth rates of 0.1% and 1.1% per quarter respectively. Compound average growth is the rate at which a series would have increased or decreased if it had grown or fallen at a steady rate over a number of periods.

During the economy’s downturn (between Quarter 1 (Jan to Mar) 2008 and Quarter 2 (Apr to June) 2009), production and all of its components contracted. However, the path of mining & quarrying was broadly unaffected by the economy’s downturn, with its output continuing to decline (Figure 2). Between the economy’s peak in Quarter 1 (Jan to Mar) 2008 and the economy’s trough in Quarter 2 (Apr to June) 2009, manufacturing experienced the largest contraction in output (12.3%) followed by total production (10.6%), water supply, sewerage & waste management (8.8%), mining & quarrying (7.3%) and electricity, gas, steam & air conditioning (3.5%).

Following the economy’s downturn (from Quarter 3 (July to Sep) 2009 to Quarter 1 (Jan to Mar) 2016), total production remained broadly stable while manufacturing and water supply, sewerage & waste management returned to growth at compound average growth rates of 0.2% and 0.8% per quarter respectively. Over the same period, mining & quarrying and electricity, gas, steam & air conditioning continued to contract at compound average growth rates of 1.2% and 0.3% per quarter respectively.

In Quarter 1 (Jan to Mar) 2016, production and manufacturing output remained below their Quarter 1 (Jan to Mar) 2008 levels by 10.0% and 6.9%, respectively. Moreover, in Quarter 1 (Jan to Mar) 2016, mining & quarrying and electricity, gas, steam & air conditioning output, which continued to decline following the downturn, were 32.5% and 12.2% below their respective values in Quarter 1 (Jan to Mar) 2008. In contrast, water supply, sewerage & waste management is the only main sector within production to have surpassed its value in Quarter 1 (Jan to Mar) 2008, by 11.7%, as of Quarter 1 (Jan to Mar) 2016.

Headline GDP surpassed its pre-downturn peak in Quarter 2 (Apr to June) 2013 and services remains the only headline industry grouping to have achieved this. 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 Gross Domestic Product, second estimate: Quarter 1 (Jan to Mar) 2016 and UK Productivity: Oct to Dec 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 9.6% between 1997 and 2015 (UK Labour Market: May 2016, EMP13).

Over the past year the manufacturing industry has experienced deflation, 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 6.5% in the year to April 2016, from a fall of 6.1% in the year to March 2016. Output prices have also experienced deflation, falling by 0.7% in the year to April 2016 (more information can be found in UK Producer price inflation: April 2016).

Figure 3 shows the share of nominal gross value added (GVA) accounted for by production in the UK and a selection of other major economies (more information on data for France, Germany, Italy, Japan and the USA can be found on the Organisation for Economic Co-operation and Development (OECD) website). In 1997, the share of nominal GVA accounted for by production in the UK was 23.3%, around the middle of the range relative to the other economies. By 2014, the UK had become relatively less reliant on production, as its share fell to 14.8% of nominal GVA.

The same trend was observed in manufacturing, where the share of nominal GVA fell from 18.4% in 1997 to 10.6% in 2014. Moreover, between 1997 and 2014, the composition of production in the UK changed, with the share of production attributed to manufacturing decreasing from 78.8% in 1997 to 72.1% in 2014.

In this release there are no periods open for revision and hence no impact on previously published estimates. The next release, UK Index of Production: May 2016, will contain revisions back to 1997 in line with the National Accounts revisions policy.

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). 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 April 2016 will be published on 10 June 2016 and services output for the same period on 30 June 2016.

Total production

Total production output in April 2016 increased by 1.6% compared with April 2015 (Table 4), the largest rise since October 2015, when it rose by an equivalent amount. This increase reflected rises in all of its 4 main sectors with manufacturing (the largest component in production) having the largest contribution, increasing by 0.8% and contributing 0.6 percentage points to total production. There were also increases in electricity, gas, steam & air conditioning output of 6.2%; in water supply, sewerage & waste management of 5.5%; and in mining & quarrying of 0.3%.

Between March 2016 and April 2016, total production increased by 2.0%, the largest increase since July 2012, following a rise of 0.3% in the previous month (Table 5). This increase reflected rises in 3 of its 4 main sectors, with manufacturing having the largest contribution, increasing by 2.3% and contributing 1.6 percentage points to total production. There were also increases in electricity, gas, steam & air conditioning output of 3.9% and in water supply, sewerage & waste management of 1.0%. These increases were slightly offset by a decrease in mining & quarrying, which decreased by 0.3% and had a negligible contribution to total production.

Manufacturing

Manufacturing output increased by 0.8% between April 2015 and April 2016, contributing 0.6 percentage points to total production. Output increased in 5 of the 13 manufacturing sub-sectors compared with a year ago (Table 4). The manufacturing sub-sector with the largest upward contribution to total production output was the manufacture of basic pharmaceutical products & pharmaceutical preparations, which increased by 12.5% and contributed 0.7 percentage points to total production. This was the largest increase since April 2009, having decreased by 2.4% in the previous month. Anecdotal evidence suggested increased exports were the main contributing factor to the rise.

In contrast, the manufacturing sub-sector with the largest downward contribution to total production output was the manufacture of basic metals & metal products. This sub-sector decreased by 4.8%, continuing the downward trend since June 2015 and contributed -0.4 percentage points to total production. The largest contribution to the decrease within this sub-sector came from the manufacture of basic iron & steel, which decreased by 29.0% and contributed -0.2 percentage points to total production. Anecdotal evidence suggested shut downs to steel production facilities towards the end of 2015 to be a contributing factor.

Manufacturing output increased by 2.3% between March 2016 and April 2016, the largest rise since July 2012 and contributed 1.6 percentage points to total production. There were increases in 10 of the 13 manufacturing sub-sectors (Table 5) with the largest upward contribution coming from the manufacture of basic pharmaceutical products & pharmaceutical preparations, which increased by 8.6% – the largest rise since February 2014, – and contributed 0.5 percentage points to total production. Anecdotal evidence suggested increased exports as a contributing factor.

In contrast, the manufacturing sub-sector with the largest downward contribution to total production in April 2016 compared with March 2016 was the manufacture of coke & refined petroleum products, which decreased by 3.7%, the sixth consecutive decrease and contributed -0.1 percentage points to total production. Anecdotal evidence suggested extended maintenance periods were a contributing factor to the fall.

Mining & quarrying

Mining & quarrying output increased by 0.3% between April 2015 and April 2016 and had a negligible contribution to total production. The sub-sector with the largest contribution to the increase was the extraction of crude petroleum & natural gas, which increased by 2.6% and contributed 0.3 percentage points to total production (Table 4).

Mining & quarrying output decreased by 0.3% in April 2016 compared with March 2016 and had a negligible contribution to total production. This followed a decrease of 0.4% in the previous month. The sub-sector with the largest contribution to the fall was the extraction of crude petroleum & natural gas, which decreased by 1.3% and contributed -0.1 percentage points to total production (Table 5).

Electricity, gas, steam & air conditioning

Electricity, gas, steam & air conditioning output increased by 6.2% in April 2016 compared with April 2015 and contributed 0.5 percentage points to total production (Table 4). This was the largest increase compared with a year ago since February 2015, having decreased by 0.6% in the previous month. This increase reflected a rise in output in one of its two sub-sectors, the manufacture of gas & distribution of gaseous fuels through mains, which increased by 26.7%. This was the largest rise since March 2013 and contributed 0.6 percentage points to total production. Anecdotal evidence suggested the increase was a result of a substantial increase in electricity generated from gas at the expense of coal, as a result of reduced coal generating capacity.

Electricity, gas, steam & air conditioning output increased by 3.9% in April 2016 compared with March 2016 and contributed 0.3 percentage points to total production (Table 5). The increase in electricity, gas, steam & air conditioning output reflected rises in output in both of its sub-sectors. The sub-sector with the largest contribution was the manufacture of gas & distribution of gaseous fuels through mains, which increased by 12.1% and contributed 0.3 percentage points to total production. Anecdotal evidence suggested an increase in the volume of gas used for the purpose of generating electricity was a contributing factor to the increase.

Water & waste management

Water supply, sewerage & waste management output increased by 5.5% in April 2016 compared with April 2015 and contributed 0.5 percentage points to total production. This reflected increases in 3 of its 4 sub-sectors’ output (Table 4), with the largest contribution coming from waste collection, treatment & disposal activities, which increased by 9.4% and contributed 0.4 percentage points to total production.

Water supply, sewerage & waste management output increased by 1.0% between March 2016 and April 2016 and contributed 0.1 percentage points to total production. This increase reflected increases in 2 of its 4 subsectors’ output, with the largest contribution coming from waste collection, treatment & disposal activities, which increased by 2.7% 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 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 the March 2016 IoP release we announced that we would be open for revisions back to January 2016 in the April 2016 release. However, in line with previous timetables for publishing revisions to IoP in the month before the Blue Book consistent release, no periods were open for revision and hence there is no impact on previously published estimates.

We will be open for revisions back to January 1997 in our next publication.

Water supply, sewerage & waste management (sector E) is 1 of the 4 main sectors within production and accounts for 8.1% of total production output. Around 46% of the total output in the sector is attributable to “waste collection, treatment & disposal activities; materials recovery” (industry 38) while the remainder consists of “water collection, treatment & supply” (industry 36), sewerage (industry 37) and “remediation activities & other waste management services” (industry 39).

Figure 4 shows that water supply, sewerage & waste management output has generally outperformed production as a whole. From Quarter 2 (Apr to June) 1997 to Quarter 1 (Jan to Mar) 2008, production output was broadly stable, whilst water supply, sewerage & waste management output grew at a compound average growth rate of 0.7% per quarter. The economy’s downturn (from Quarter 1 (Jan to Mar) 2008 to Quarter 2 (Apr to June) 2009) affected the sector and production as a whole severely, with production output contracting by 10.6% while the output of water supply, sewerage & waste management contracted by 8.8% over the same period.

Following the downturn (from Quarter 3 (July to Sept) 2009 to Quarter 1 (Jan to Mar) 2016), production has struggled to recover and remains 10% below its level in Quarter 1 (Jan to Mar) 2008. Water supply, sewerage & waste management performed better, growing at a compound average growth rate of 0.8% per quarter. This strong recovery in water supply, sewerage & waste management output meant it surpassed its pre-downturn level in Quarter 4 (Oct to Dec) 2011. In Quarter 1 (Jan to Mar) 2016 the level of output of water supply, sewerage & waste management output was 11.7% above its level in Quarter 1 (Jan to Mar) 2008.

Figure 5 shows that whilst water supply, sewerage & waste management output has performed relatively strongly compared to production as a whole, the performance of its industries has varied. Whilst industries 37 (sewerage), 38 (waste collection, treatment & disposal activities; materials recovery) and 39 (remediation activities & other waste management services) have seen similar rates of growth, industry 36 (water collection, treatment & supply) has contracted. Between Quarter 1 (Jan to Mar) 1997 and Quarter 1 (Jan to Mar) 2016, the output of industries 37 (sewerage), 38 (waste collection, treatment and disposal; materials recovery) and 39 (remediation activities & other waste management services) grew at compound average growth rates of 0.8%, 0.8% and 0.9% per quarter respectively, following similar paths to water supply, sewerage & waste management. However, over the same period, industry 36 (water collection, treatment & supply) has contracted at a compound average growth rate of -0.2% per quarter.