Index of Production, UK: January 2016

Total production is estimated to have increased by 0.3% between December 2015 and January 2016. There were increases in 3 of the 4 main sectors, with manufacturing (the largest component of production), having the largest positive contribution, increasing by 0.7%.

The largest contribution to the increase in manufacturing, between December 2015 and January 2016, came from other manufacturing & repair, which increased by 4.8%. This industry includes the manufacture of furniture, other manufacturing & repair and installation of machinery & equipment.

Total production output is estimated to have increased by 0.2% in January 2016 compared with the same month a year ago. The only main sector to rise was water supply, sewerage & waste management, which increased by 9.3%.

Manufacturing output is estimated to have decreased by 0.1% in January 2016 compared with January 2015. Output decreased in 7 of the 13 manufacturing sub-sectors compared with a year ago.

In the 3 months to January 2016, production and manufacturing were 10.2% and 6.4% respectively below their figures reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.

In this release, periods back to January 2015 are open for revision, in line with the National Accounts revisions policy. The impact of IoP revisions on previously published estimates of GDP are minimal.

This bulletin presents the monthly estimates of the Index of Production (IoP) for the UK production industries, January 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, 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 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 October 2013 to January 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, 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 have been published in the background notes ‘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.

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.

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.

After 2 consecutive months of falling output at the end of 2015, production output experienced modest growth in January 2016. Overall, the level of production in the latest month is higher than January 2015 by 0.2%. This results from positive growth in the first 3 quarters of 2015, followed by negative growth in Quarter 4 (Oct to Dec) 2015 – which was the first quarter of negative growth since Quarter 4 (Oct to Dec) 2012.

Throughout the previous 12 months, manufacturing experienced alternating periods of expansion and contraction which have resulted in current manufacturing levels being 0.1% lower than those recorded in January 2015 (for more information and analysis of the latest figures see the production and sectors supplementary analysis section of the bulletin).

From Quarter 1 (Jan to Mar) 1997 to Quarter 4 (Oct to Dec) 2015, production and its main components followed 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 was relatively flat at 0.0%, while mining & quarrying contracted faster than production at a negative compound average growth rate of 1.0% per quarter. A 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 UK economy’s downturn (from Quarter 1 (Jan to Mar) 2008 to 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 contracting only slightly faster than prior to the downturn (Figure 2). From the economy’s peak in Quarter 1 (Jan to Mar) 2008 to the economy’s trough in Quarter 2 (Apr to June) 2009, manufacturing experienced the largest contraction (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 UK economy’s downturn (from Quarter 3 (July to Sep) 2009 to Quarter 4 (Oct to Dec) 2015), 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 0.7% respectively. However, over the same period, mining & quarrying and electricity, gas, steam & air conditioning continued to contract at compound average growth rates of 1.1% and 0.4%, per quarter.

In Quarter 4 (Oct to Dec) 2015, production and manufacturing remained below their Quarter 1 (Jan to Mar) 2008 levels by 9.7% and 6.5%, respectively. Moreover, in Quarter 4 (Oct to Dec) 2015, mining & quarrying and electricity, gas, steam & air conditioning output, which continued to decline following the downturn, were 30.9% and 12.6% below their respective values in Quarter 1 (Jan to Mar) 2008. Water supply, sewerage & waste management remains the only main sector within production to have surpassed its value in Quarter 1 (Jan to Mar) 2008, by 9.2%, as of Quarter 4 (Oct to Dec) 2015.

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 Labour Productivity, Quarter 3 (July to Sep) 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 (Labour Market Statistics, February 2016, dataset Employment by industry: 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 7.6% in the year to January 2016, from a fall of 10.4% in the year to December 2015. Output prices have also experienced deflation, falling by 1.0% in the year to January 2016. 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 Index, January 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 2013, the UK had become relatively less reliant on production, as its share fell to 15.4% of nominal GVA.

The same trend was observed in manufacturing, where the share of nominal GVA fell from 18.4% in 1997 to 10.8% in 2013. Moreover, from 1997 to 2013, the composition of production in the UK changed slightly, with the share of production attributed to manufacturing decreasing from 78.8% in 1997 to 69.8% in 2013.

In this release, the earliest period open for revision was January 2015, 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). All the components are available for Quarter 4 (Oct to Dec) 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 January 2016 will be published on 11 March 2016 and services output for the same period on 31 March 2016.

Total production

Total production output increased by 0.2% in January 2016 compared with January 2015 (Table 3). This increase reflected a rise in 1 of the 4 main sectors, water supply, sewerage & waste management output, which increased by 9.3% and contributed 0.8 percentage points to total production. Largely offsetting this increase were decreases in electricity, gas, steam & air conditioning output, which decreased by 3.9% and contributed 0.3 percentage points to total production; in mining & quarrying output, which decreased by 1.1% and contributed 0.1 percentage points; and in manufacturing, the largest component of production, which decreased by 0.1% and contributed 0.1 percentage points to total production (Figure 4).

Between December 2015 and January 2016, total production increased by 0.3% following a fall of 1.1% in the previous month (Table 3). There were increases in 3 of its 4 main sectors. The largest positive contribution came from manufacturing, which increased by 0.7% and contributed 0.5 percentage points to total production. There were also increases in electricity, gas, steam & air-conditioning output, which increased by 4.3% and contributed 0.4 percentage points to total production and in water supply, sewerage & waste management output, which increased by 1.1% and contributed 0.1 percentage points to total production. Partially offsetting the increases was a decrease in mining & quarrying output, which decreased by 5.0% and contributed 0.7 percentage points to total production (Figure 5).

Manufacturing

Manufacturing output decreased by 0.1% between January 2015 and January 2016 and contributed 0.1 percentage points to total production. Output decreased in 7 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 output was the manufacture of machinery & equipment not elsewhere classified, which decreased by 6.5% and contributed 0.3 percentage points to total production. This was the 14th consecutive decrease since November 2014.

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, which increased by 4.8% and contributed 0.4 percentage points to total production. This was the 17th consecutive increase since August 2014. The largest contribution within this sub-sector came from the manufacture of motor vehicles, trailers & semi trailers, which increased by 8.0% and contributed 0.4 percentage points to total production.

Manufacturing output increased by 0.7% between December 2015 and January 2016, having decreased by 0.3% the previous month. There were increases in 8 of the 13 manufacturing sub-sectors (Figure 5). The manufacturing sub-sector with the largest upward contribution to total production was other manufacturing & repair, which increased by 4.8% and contributed 0.3% percentage points to total production. The largest contribution to the increase within this sub-sector came from other manufacturing, which increased by 11.9%, its largest recorded rise, contributing 0.3 percentage points to total production.

In contrast, the manufacturing sub-sector with the largest downward contribution to total production was the manufacture of pharmaceutical products & pharmaceutical preparations, which decreased by 5.9% and contributed 0.3 percentage points to total production. This followed a rise of 1.3% in the previous month.

Mining & quarrying

Mining & quarrying output decreased by 1.1% between January 2015 and January 2016 and contributed 0.1 percentage points to total production. The sub-sector with the largest contribution to this decrease was other mining & quarrying, which decreased by 9.6% and contributed 0.3 percentage points to total production (Figure 4).

Mining & quarrying output decreased by 5.0% in January 2016 compared with December 2015, the third consecutive decrease. The sub-sector with the largest contribution was the extraction of crude petroleum & natural gas, which decreased by 6.3% and contributed 0.7 percentage points to total production (Figure 5). Anecdotal evidence suggested that stormy weather was a contributing factor to the decrease in output observed in the oil and gas production facilities in the North Sea.

Electricity, gas, steam & air conditioning

Electricity, gas, steam & air conditioning output decreased by 3.9% in January 2016 compared with January 2015, the third consecutive decrease (Figure 4). This reflected a fall in output in 1 of its 2 sub-sectors, electric power generation, transmission & distribution, which decreased by 5.5% and contributed 0.4 percentage points to total production. Evidence cited the decrease in demand was due to warmer than usual weather temperature and the increase in the fuel mix costs as contributing factors. The 3 main elements in the fuel mix for the generation of electricity are coal, gas and nuclear power.

Electricity, gas, steam & air conditioning output increased by 4.3% in January 2016 compared with December 2015 and contributed 0.4 percentage points to total production (Figure 5). This reflected an increase in output in both of its sub-sectors; the largest contribution came from the manufacture of gas & distribution of gaseous fuels through mains, which increased by 16.7% and contributed 0.3 percentage points to total production, having decreased by 10.1% in the previous month (Figure 5). Evidence suggested that the larger than average drop in temperature between December 2015 and January 2016 (source Met Office) when compared with the previous year and the increase in gas used for the purpose of generating electricity may have been contributing factors to the increase in output.

Water & waste management

Water supply, sewerage & waste management output increased by 9.3% in January 2016 compared with January 2015, the largest rise since January 2014 and contributed 0.8 percentage points to total production. This increase reflected a rise in 3 of its 4 sub-sectors’ output (Figure 4), with the largest contribution coming from sewerage output, which increased by 20.2% and contributed 0.5 percentage points to total production. Evidence suggested that January 2016, which was provisionally the fourth wettest January in the UK since 1910 (source Met Office), may have contributed to the increase in sewerage output.

Water supply, sewerage & waste management output increased by 1.1% between December 2015 and January 2016 and contributed 0.1 percentage points to total production. This increase reflected rises in all of its 4 sub-sectors. The largest contribution to the increase came from waste collection, treatment & disposal activities, which increased by 1.4% and contributed 0.1 percentage points to total production, having increased by 2.3% in the previous month (Figure 5).

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 this release of data, the earliest period open for revision was January 2015. There were no revisions to IoP month-on-month growth rates greater than 0.1 percentage points. Further details on the revisions to IoP components can be found in the IOP5R tables.

In 2015, mining & quarrying experienced positive annual growth for the first time since 1999 (Figure 6). The growth of 6.9% in 2015 was significantly higher than the decrease of 0.5% in 2014 and above the long-run compound average growth rate from 1998 to 2014, a contraction of 4.8%. A 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.

Figure 7 examines the contributions to mining & quarrying from its 3 main components, for the latest year (2015), the UK economy’s pre-downturn period (from 1998 to 2007) and the post-downturn period (from 2010 to 2014). The strong growth seen in mining & quarrying in 2015 was driven by the extraction of crude petroleum & natural gas (the biggest component within mining & quarrying), which made the only positive contribution (of 8.1 percentage points).

Historically the extraction of crude petroleum and natural gas has made negative contributions to mining & quarrying, on average there were decreases of 3.4 percentage points in the pre-downturn period (from 1998 to 2007) and 8.1 percentage points in the post-downturn period (from 2010 to 2014). However, in 2015 its performance may have been boosted by government reforms announced in the March Budget 2015 and Summer Budget 2015. These reforms included, among others, the introduction of a new investment allowance, a reduction in the supplementary charge from 30% to 20% and a reduction in the petroleum revenue tax from 50% to 35%. Moreover, the Department for Energy and Climate Change (DECC) cited that UK dependence on crude oil imports had decreased in 2015 as a result of a new UK oil field (Golden Eagle) coming online and maintenance issues not affecting 2015 production levels as severely as they did in 2014 (Energy Trends section 3: oil and oil products).

Mining of coal & lignite has consistently made negative contributions to mining & quarrying across the 3 periods (Figure 7). Despite this industry contracting by 22.8% on an annual basis in 2015, its relatively small weight of 1.3% (of mining & quarrying) resulted in a negative contribution of only 0.3 percentage points to growth. Historically other mining & quarrying plus support services has been the only industry having modest positive contributions to mining & quarrying in the period prior to the downturn and following the downturn, however, in 2015 it reversed its historical trend to make a slight negative contribution (of 0.4 percentage points). Evidence from the Department for Energy and Climate Change suggested that the fall in mining of hard coal from open cast coal working (surface mining) was due to surface mines producing less coal as they were coming to the end of coaling. In addition, the last UK large deep mine closed in December 2015.