Index of Production, UK: December 2018

• Production output fell by 1.1% in Quarter 4 (Oct to Dec) 2018, compared with Quarter 3 (July to Sept) 2018, due mainly to a fall of 0.9% in manufacturing; this is the first time since Quarter 1 (Jan to Mar) 2009 that all four main sectors have fallen during a quarter.

• The decrease of 0.9% in manufacturing in Quarter 4 2018 is the strongest fall since Quarter 4 2012; there is broad-based weakness with the largest falls in transport equipment (2.7%) and basic metals (3.0%).

• Production output fell by 0.5% between November 2018 and December 2018; the manufacturing sector provided the largest downward contribution with a fall of 0.7%, its strongest monthly fall since January 2017 and marking the sixth consecutive monthly decrease.

• The monthly decrease in manufacturing was due to falls in 9 of the 13 sub-sectors; the largest downward contribution came from pharmaceuticals (4.2%) and other manufacturing and repair (2.8%).

• In Quarter 4 2018, production output decreased by 1.0% compared with Quarter 4 2017; the weakest growth since Quarter 2 2013, driven by a fall of 1.5% from manufacturing.

• In 2018, production output increased by 0.7% compared with 2017, led by an increase of 0.9% from manufacturing and supported by increases from mining and quarrying (2.7%) and electricity and gas (0.6%).

This release contains revisions from January 2018 and is consistent with the National Accounts Revisions Policy.

The Index of Production (IoP) is an important economic indicator and one of the short-term measures of economic activity in the UK. It is used in the compilation of gross domestic product (GDP); the production industries’ weight accounts for 13.8% of the output approach to the measurement of GDP.

The current price non-seasonally adjusted estimates of industries collected by the Monthly Business Survey (MBS) can be found in the Monthly Business Survey turnover in production industries dataset, which was published alongside this release. Note that the MBS turnover in production industries dataset does not contain data from VAT returns, which have been included in the IoP.

This release includes VAT data for Quarter 2 (April to June) 2018.

Care should be taken when using the month-on-month growth rates as data can often be volatile; longer-term growth rates and examination of the time series allow for better interpretation of the statistics.

Figures 1 and 2 show that both the Index of Production and Index of Manufacturing followed a broadly upward trend following the economic downturn. Growth was more pronounced from the beginning of 2010, as the economy recovered, before a downturn during 2012. Production and manufacturing output have risen since then but remain 6.8% and 2.7% lower respectively in Quarter 4 (Oct to Dec) 2018 than the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

Table 1 shows the growth rates and contributions for the IoP and sectors for December 2018.

Total production output for Quarter 4 (Oct to Dec) 2018, compared with Quarter 3 (July to Sept) 2018, decreased by 1.1% (Figure 3). This is the weakest growth since Quarter 4 2012, when production fell by 2.3% and is the first time weakness has been seen in all four main sectors during a quarter since Quarter 1 (Jan to Mar) 2009.

In the three months to December 2018, the fall of 1.1% was the lowest three-monthly growth since January 2016, when output also fell by 1.1% and all four main sectors have fallen for the second consecutive period.

The current quarterly fall was due primarily to a decline in manufacturing output of 0.9%, recording its weakest growth since Quarter 4 2012, when it fell by 1.8%. Of the 13 sub-sectors within manufacturing, 10 decreased, highlighting widespread weakness throughout the sector.

Providing the largest downward contribution was transport equipment, which fell by 2.7% due to a fall of 4.9% in motor vehicles, trailers and semi-trailers. The weakness is attributed to the impact of shutdowns within this industry in Quarter 4 2018.

Since the end of 2016, demand for new cars in the UK has weakened as highlighted in the November 2018 Index of Services (IoS) bulletin. Responder-led feedback suggests the impact of Vehicle Excise Duty changes in April 2017 impacted on demand for diesel cars, which in turn resulted in displacement to petrol vehicles and increased demand for alternative fuel vehicles.

From September 2018, responder feedback noted that the introduction of the worldwide harmonised light vehicle test procedure (WLTP) impacted production. These tests were applied to all new car registrations starting from September 2018 and are part of new regulations that are used to measure fuel consumption and CO2 emissions from passenger cars, as well as their pollutant emissions.

In addition, weak domestic sales and a gradual decline in export sales in this industry, since a peak in October 2017 (see our Monthly Business Survey in production industries), have contributed to the recent decline in the index level, with anecdotal evidence from respondents confirming weakening global demand (Figure 4).

The second-largest downward contribution was basic metals and metal products, which fell by 3.0% following a rise of 1.5% in Quarter 3 2018. This was due mainly to widespread weakness from large businesses (with employment greater than 150 persons on average) across the industry. The largest downward contribution was from the manufacturing of fabricated metals sub-industry, falling by 3.0% in Quarter 4 2018, following a rise of 1.5% in Quarter 3 2018.

The fall of 2.0% within electricity and gas supply was due mainly to a decrease of 3.2% from electricity generation and distribution due to less demand. The temperatures in November and December were above the long-term average by 1.1 degrees Celsius and 1.9 degrees Celsius respectively.

Mining and quarrying fell by 1.4%, driven by a decrease of 2.1% in oil and gas extraction. This was due mainly to increased output during Quarter 3 2018, where notable strength in the monthly index in August 2018 was due to less maintenance taking place than in August 2017. In addition, there was maintenance in November 2018 further reducing Quarter 4 2018.

Water and waste fell by 0.4%, led by downward contributions from sewerage, which fell by 3.3% and water supply, which fell by 2.3%. This was a fall back from the rise of 0.8% in Quarter 3 2018 due to increased demand caused by warmer weather.

Monthly total production output decreased by 0.5% in December 2018, the fifth consecutive fall in output since July 2018. The weakness is due primarily to manufacturing decreasing by 0.7% and a decrease in electricity and gas of 0.4%.

This is the sixth consecutive monthly fall in manufacturing since June 2018 and the strongest fall in output since January 2017, when it fell by 1.4%, following a rise of 2.6% in December 2016.

There is widespread weakness this month, with 9 of the 13 sub-sectors falling. Of these, pharmaceuticals, which can be highly volatile, provided the largest negative contribution, with a decrease of 4.2%. There was also a notable fall of 2.8% from the other manufacturing and repair sub-sector, where four of the five sub-industries fell due to the impact of weakness from large businesses (with employment greater than 150 persons on average).

Providing supporting negative contributions to growth were wood and paper products and printing, which fell by 1.6%, following strong growth of 3.0% in the previous month; basic metals and metal products, which fell by 1.0% and computer, electronic and optical products, which fell by 0.8%.

Electricity and gas fell by 0.4%, due to reduced demand attributed to the warmer than average temperature in December 2018. Within this sector, electricity generation and distribution decreased by 0.4%. The Met Office reports that for December 2018, the provisional UK mean temperature was 5.8 degrees Celsius, which is 1.9 degrees Celsius above the 1981 to 2010 long-term average.

Providing the largest upward contribution was the water and waste sector, which increased by 1.0%. This was due mainly to a rise of 2.1% from waste collection, caused by large businesses (with employment greater than 150 persons on average) experiencing less of a decrease in turnover than expected into December 2018.

Also displaying increased output was the mining and quarrying sector, which rose by 0.5% due to a rise of 1.8% in oil and gas extraction. The Department for Business, Energy and Industrial Strategy reported strong production during December 2018, helped by a return to production following maintenance during November 2018, when oil and gas extraction fell by 1.9%.

Total production output for Quarter 4 (Oct to Dec) 2018 has decreased by 1.0%, compared with Quarter 4 2017, driven by a fall in output from three of the four main sectors. It is also the strongest fall in output since August 2013, when it fell by 1.3% and the weakest quarter-end growth since Quarter 2 2013, when output fell by 1.1%.

The electricity and gas sector fell by 1.7%, due primarily to reduced demand following warmer than average temperatures during November and December 2018. The water and waste sector fell by 1.6%, driven by a decrease of 8.1% from sewerage due to large businesses restructuring.

Providing the largest downward contribution was manufacturing, which fell by 1.5%, the strongest fall since May 2013 when it fell by 1.9% and the strongest quarterly fall since Quarter 1 (Jan to Mar) 2013, when it fell by 3.3%.

The fall in manufacturing was driven by notable decreases from:

• basic metals and metal products, at 7.0%, due primarily to a fall of 5.6% within fabricated metals other than weapons, caused by cumulative weakness from a number of large businesses, underpinned by a fall in export turnover of 14.0%
• transport equipment, at 3.9%, due mainly to the impact of shutdowns and reduced production within motor vehicles, trailers and semi-trailers, which fell by 5.4%

Partially offsetting the decline in overall manufacturing growth was a rise of 8.0% within computer, electronic and optical products, continuing the recent strength within this sub-sector and driven by large businesses manufacturing instruments for measuring, testing and navigation. The food, beverages and tobacco sub-sector rose by 2.0%, underpinned by strong nominal export growth of 18.9% within alcoholic beverages and tobacco products, as reported in our Monthly Business Survey.

Manufacturing output fell for the second consecutive period in the three months to December 2018. It is helpful to understand the longer-term trend, which shows that since growth peaked in November 2017 at 3.9%, manufacturing output has slowed, effectively supporting a similar decline in total production output (Figure 5).

This is underpinned by a steady decline in total manufacturing export growth for the three months to December 2018, on the same three months a year ago. Consecutive falls from October 2018 to December 2018 have resulted in export growth not only falling behind domestic growth but growth is now negative for Quarter 4 2018 compared with Quarter 4 2017 (Table 2).

The most notable decline in export growth came from:

• fabricated metal products, within the basic metals and metal products sub-sector
• motor vehicles, trailers and semi-trailers; and aircraft, spacecraft and related machinery, within the transport equipment sector
• electrical equipment

Domestic growth has remained relatively steady in comparison (Figure 6). Total turnover and exports are reported in the Monthly Business Survey, at current prices and are not seasonally adjusted.

The overall decline in total production output was partially offset by a 5.9% increase from mining and quarrying. Strength here was due primarily to the impact of the unplanned shutdown of the Forties pipeline during December 2017, which drove a significant fall of 23.5% in the monthly growth for oil and gas extraction.

In 2018, total production increased by 0.7%, following a rise of 1.8% in 2017, with rises in three of the four main sectors (Table 3). This is the fifth consecutive annual rise, but the weakest rise since 2013, when it fell by 0.7%.

Manufacturing provided the largest contribution to the annual growth, rising by 0.9%, with 6 of the 13 sub-sectors increasing. Computer, electronic and optical products provided the largest growth, increasing by 12.4%. This rise is driven mainly by large businesses, where both domestic and export sales have increased by 19.1% and 10.6% respectively as reported in the Monthly Business Survey for production industries dataset.

Food products, beverages and tobacco increased by 1.9%, the strongest growth since 2014. The alcoholic beverages sub-industry increased by 4.9% due to a strong summer in 2018 and bakery and farinaceous products rose by 3.8%.

In 2018, pharmaceutical products recorded a growth of 3.3% following a fall of 5.4% in 2017. This was attributed to strong export sales, growing by 15.3%, while domestic sales fell by 3.6% in the underlying Monthly Business Survey data.

This was partially offset by a fall of 7.9% in electrical equipment, where businesses restructuring earlier in the year and a widespread weakness across the industry were the contributing factors.

Despite the annual growth for manufacturing of 0.9%, total manufacturing output is weaker than 2017, when it increased by 2.5%. The weakness is highlighted when viewing the contributions to growth for total manufacturing and sub-sectors for 2018 compared with 2017. Figure 7 shows that the decline in manufacturing output was due primarily to weaker contributions during 2018 from 10 of the 13 sub-sectors led by:

• other manufacturing and repair (CM)
• transport equipment (CL)
• machinery and equipment not elsewhere classified (CK)
• electrical equipment (CJ)

These were partially offset by improved performance within pharmaceuticals (CF), computer, electronic and optical products (CI) and food, beverages and tobacco (CA).

An article titled Manufacturing sector performance, UK: 2008 to 2018 will be published on 15 March 2019.

Alongside this publication we publish the Index of Services (IoS) and Construction output in Great Britain, allowing for an estimate of monthly gross domestic product (GDP), which is also published today (11 February 2019).

The corresponding price indices used to deflate the Index of Production (IoP) are published in the monthly publication of UK producer price inflation. Product sales by manufacturers are published on an annual basis in UK manufacturers’ sales by product (ProdCom) statistical bulletins; estimates are in current prices, unlike the chained volume measures published in the IoP release.

The data published by the Department for Business, Energy and Industrial Strategy (BEIS) in Energy trends are used to measure the mining and quarrying, electricity and gas, and the manufacture of coke and refined petroleum products sectors within this release.

The IoP follows the Eurostat short-term statistics (STS) regulation for measuring output in production. The latest release of industrial production and output in manufacturing are available from Eurostat and are updated monthly. It should be noted that an accurate comparison cannot be made between our publication and the Eurostat publication without re-indexing the data to the same base year, as Eurostat data are calculated on a 2015 equals 100 basis, while UK data are calculated on a 2016 equals 100 basis.

The Index of Production (IoP) measures the UK output in the mining and quarrying; manufacturing; energy supply; and water supply and waste management industries. The IoP estimates are based mainly on data from the Monthly Business Survey (MBS).

In addition, from the Index of Production, UK: November 2017 bulletin published in January 2018, Value Added Tax (VAT) data have been included across 64 production industries for small and medium-sized businesses. For further information as to the use of VAT turnover within the national accounts, please see VAT turnover data in National Accounts: background and methodology (published on 19 March 2018).

On 11 October 2018, we published an article on the future use of VAT as part of the economic review, which considers the strategic collection model for administrative and survey data for short-term indicators, including the Index of Production.

For the mining and quarrying, and energy supply sectors, and two manufacturing industries, namely coke and refined petroleum, and basic iron and steel, we receive volume data from the Department for Business, Energy and Industrial Strategy (BEIS) and the International Steel Statistics Bureau (ISSB) respectively. Unless otherwise stated, all estimates included in this release are based on seasonally adjusted data.

The Monthly Business Survey (MBS) turnover in production industries dataset produces the proportion of turnover from exports by industry and level of turnover and exports (£ millions). However, this is not always comparable with UK trade statistics, for many reasons. These include, but are not limited to:

• different data sources – MBS are based on a survey of businesses; UK trade in goods uses administrative data collected by HM Revenue and Customs (HMRC)
• different concepts being measured – MBS reports the value of exports as a proportion of the industry's turnover; the UK trade in goods data report the change in ownership between the UK and other countries
• time lag – there can be time lags between the sale of a product reported in MBS and the movements of that product reported by UK trade

Further information on UK trade and how data on it are compiled can be found in the Things you need to know about this release section of the UK trade release.

The data collected on the MBS are turnover excluding VAT and exports for some applicable industries. The data collected on the VAT returns are also turnover excluding VAT. These data are then deflated using Producer Price Indices (PPI). Within the manufacturing sector we also receive direct volume data from BEIS for fuel industries and from the International Steel Statistics Bureau for steel industries.

The mining and quarrying sector is comprised mainly of data from BEIS, including volume of oil and gas extraction and coal extraction. The data used to produce the energy sector are also from BEIS and include energy and gas supply output. A comprehensive list of the IoP source data can be found in the Gross domestic product (GDP(O)) source catalogue (XLS, 715KB).

Revisions to the Index of Production can be made for a variety of reasons. The most common include:

• 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
• HMRC VAT returns replacing MBS data for small and medium-sized businesses when VAT estimates become available every quarter

Within the suite of datasets published monthly alongside this release, you will find:

• Output of the production industries (IOP5) publication tables
• Revisions to output of the production industries (IOP5R)
• Monthly Business Survey response rates for production industries for this publication
• Revision triangle – monitors the size of monthly and three-monthly revisions
• Index of Production weights 2016 equals 100
• Index of Production and industry sectors to four decimal places
• Monthly Business Survey turnover in production industries
• Export proportions for manufacturing industries

The Index of Production Quality and Methodology Information report contains important information on:

• the strengths and limitations of the data and how it compares with related data
• uses and users of the data
• how the output was created
• the quality of the output including the accuracy of the data

Summary information can be found in the Index of Production Quality and Methodology Information report.