Index of Services, UK: June 2015

• The Index of Services is estimated to have increased by 3.0% in June 2015 compared with June 2014. All of the 4 main components of the services industries increased in the most recent month compared with the same month a year ago
• The largest contributions came from: business services and finance, which contributed 1.4 percentage points to total growth; and distribution, hotels and restaurants, which contributed 0.8 percentage points to total growth
• The latest Index of Services estimates show that output increased by 0.5% between May 2015 and June 2015, following an increase of 0.2% between April 2015 and May 2015
• The Index of Services increased by 0.7% in Quarter 2 (Apr to June) 2015 compared with Quarter 1 (Jan to Mar) 2015. This figure was unrevised from the estimate used in the Gross Domestic Product Preliminary Estimate (GDP), published on 28 July 2015. This figure is consistent with the Second Estimate of GDP, published on 28 August 2015
• The figures within this release are estimates and are on a seasonally adjusted basis. The earliest period open for revision in this release is April 2015

About the IoS

The monthly IoS provides a timely indicator of growth in the output of the services industries. The IoS is an important economic indicator and shares exactly the same industry coverage as the corresponding quarterly series within UK gross domestic product (GDP). The primary purpose of the IoS is to produce a short-term measure of the output of the services industries within the UK economy and show the monthly movements in the gross value added (GVA) of the service industries (2007 Standard Industrial Classification (SIC 2007 ) sections G to T).

The 4 main components of the services industries are:

• distribution, hotels and restaurants

• transport, storage and communication

• business services and finance

• government and other services

The IoS is the largest contributor to the output approach to the measurement of GDP, accounting for 78.4% of UK GDP in 2011.

All data in this bulletin are seasonally adjusted estimates and have had the effect of price changes removed (in other words, the data are deflated). Further information on some of the main concepts (including seasonal adjustment and deflation) underlying the estimates can be found in background note 9.

The quality of the IoS

The IoS is published around 8 weeks after the end of the reference month. There is no simple way of measuring the accuracy of the IoS, that is, the extent to which the estimate measures the underlying “true” value of the output growth (of the services industries) in the UK for a particular period. All estimates, by definition, are subject to statistical uncertainty and for many well-established statistics the Office for National Statistics (ONS) measures and publishes the sampling error associated with the estimate, using this as an indicator of accuracy. However, as IoS is constructed from a wide variety of data sources, some of which are not based on random samples, we don’t publish a measure of the sampling error associated with the IoS.

Reliability is one dimension of measuring accuracy, 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 IoS are typically small (around 0.1 to 0.2 percentage points), with the frequency of upward and downward revisions broadly equal. More information on the most recent revisions analysis can be found in the component analysis section and in background note 14.

It should be noted that care should be taken when using the month-on-month growth rates, due to their volatility (background note 8).

Further information on the quality of the IoS is available in the Quality of the IoS (29 Kb Pdf) report on the Index of Services Methods page on our website. It should be noted that as part of the IoS industry review process, we are continually working on methodological changes to improve the accuracy of the IoS.

The Index of Services (IoS) measures the quantity of output from all UK services industries, which account for more than three-quarters of the output approach to the measurement of gross domestic product. Index values are presently referenced to 2011 so that the average for 2011 is equal to 100. Therefore, an index value of 110 would indicate that output is 10% higher than the average for 2011.

As seen in Figure 1, the IoS increased by 3.0% in June 2015 compared with June 2014. In order of their contribution to growth (listed in reference table IOS1):

1. business services and finance increased by 3.4%

2. distribution, hotels and restaurants increased by 4.6%

3. transport, storage and communication increased by 4.4%

4. government and other services increased by 0.6%

Further detail on these movements can be found in the component analysis section.

Between May 2015 and June 2015, as seen in Figure 2, the IoS increased by 0.5%.

All 4 main components of the services industries increased in the most recent month compared with the previous month. In order of their contribution to growth (listed in reference table IOS1):

1. business services and finance increased by 0.7%

2. transport, storage and communication increased by 1.0%

3. distribution, hotels and restaurants increased by 0.6%

4. government and other services increased by 0.1%

More detail on individual components can be found in the IOSCOMP tables in the data section of this bulletin. The tables also provide information on the growth for the 3 months ending in June 2015 compared with the previous 3 months and compared with the 3 months ending June 2014.

Total services grew by 2.8% between Quarter 2 (Apr to June) 2014 and Quarter 2 (Apr to June) 2015, and by 0.7% between Quarter 1 (Jan to Mar) 2015 and Quarter 2 (Apr to June) 2015. This is compared with growth rates of 2.6 % and 0.7 % for the economy as a whole.

Historically, the services industries have grown at a faster rate than all other headline industries. While GDP has grown at an average compound annual rate of 2.0% since 1997, services has grown at an average compound annual rate of 2.8% (more information can be found in Second Estimate of Gross Domestic Product - Quarter 2 (Apr to June) 2015. This has led to a continuing re-orientation of the economy towards services, despite productivity in the services industries rising more slowly than in the production industries (and manufacturing in particular) since 1997 (more information can be found in Labour Productivity, Quarter 1 (Jan to Mar) 2015). The higher output growth, therefore, reflects the increasing share of the labour force employed in services, which has grown from 73.0% to 79.0% between 1997 and 2014 (Labour Market Statistics, August 2015, reference table EMP13).

Figure 3 shows the share of gross value added accounted for by services in the UK and in other G7 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 gross value added accounted for by services in the UK was just under 70%, around the middle of the range relative to the other G7 economies. By 2013, its share had risen to almost 80%, therefore the UK economy has become the most reliant on services among the G7 countries considered.

In addition to strong long-run growth, the services industries were also less affected by the downturn in 2008 than other industries, such as production and construction and subsequently recovered more quickly. The services industries are mainly responsible for the recovery of the economy as a whole, being the only industry grouping to have surpassed its pre-downturn peak.

We have looked at the growth rates of the different industry groupings since 1997 in previous releases of the Index of Services.

With a weight of 78.4%, the services industries are the largest industrial grouping in the output approach to measuring GDP. The releases for the short-term economic indicators that feed directly into the output approach to measuring GDP include a table detailing growth in the 4 main industrial groupings (Table 2). This will aid understanding of the relationship between the individual short-term releases and GDP output.

In Quarter 2 (Apr to June) 2015, GDP was estimated to have increased by 0.7% compared with the previous quarter. The contribution an industry grouping makes to the GDP quarterly growth is dependent on the quarterly change in that industry grouping and its weight within the output approach to measuring GDP.

Monthly estimates are produced for each industrial grouping except agriculture. The June 2015 estimates for production and construction were published on 6 August 2015 and 14 August 2015 respectively. The Second Estimate of Gross Domestic Product for Quarter 2 (Apr to June) 2015 was published on 28 August 2015, alongside this bulletin.

Distribution, hotels and restaurants

The index of distribution, hotels and restaurants increased by 4.6% in June 2015 compared with June 2014, following an increase of 4.2% in May 2015 compared with the same month a year earlier. The main contributors to the increase were: retail trade, except of motor vehicles and motorcycles, which rose by 4.0%; wholesale and retail trade and repair of motor vehicles and motorcycles, which rose by 9.6%; and accommodation, which rose by 13.6%.

Transport, storage and communication

The index of transport, storage and communication increased by 4.4% in June 2015 compared with June 2014, following an increase of 4.0% in May 2015 compared with the same month a year earlier. The main contributors to the increase were: publishing audiovisual and broadcasting activities, which rose by 11.3%; computer programming, consultancy and related activities, which rose by 6.0%; and land transport, which rose by 3.3%.

Business services and finance

The index of business services and finance increased by 3.4% in June 2015 compared with June 2014, following an increase of 3.0% in May 2015 compared with the same month a year earlier. The main contributors to the increase were: other professional service activities, which rose by 5.7%; administrative and support services activities, which rose by 4.4%; and real estate activities, which rose by 1.9%.

Government and other services

The index of government and other services increased by 0.6% in June 2015 compared with June 2014, following an increase of 0.5% in May 2015 compared with the same month a year earlier. The main contributors to the increase were: human health and social work activities, which rose by 2.0%; other service activities, which rose by 2.5%; and activities of households as employers of domestic personnel, which rose by 7.4%.

Revisions

The Index of Services (IoS) follows the National Accounts Revisions policy (43.3 Kb Pdf) . Revisions are caused by a number of factors including, but not limited to:

• revisions to source data due to late responses

• actual data replacing forecast data

• revisions to seasonal factors that are re-estimated every period

More information on IoS revisions is available on the Index of Services Methods page.

We produce revisions triangles of services growth to provide users with one indication of the reliability of this main indicator. Statistical tests are performed on the average revision to test if it is statistically significantly different to 0. Further information can be found in background note 15.

In this release of data, the earliest period open to revision is April 2015. The growth rate for April 2015 compared with April 2014 (2.8%) was unrevised. The month-on-month growth rate for April 2015 compared with March 2015 (0.2%) was also unrevised. The growth rate for May 2015 compared with May 2014 was revised down 0.1% from 2.7% to 2.6%. The largest contributor to the revision was business services and finance. The month-on-month growth rate for May 2015 compared with April 2015 was revised down 0.1% from 0.3% to 0.2%. The largest contributor to the revision was business services and finance.

Further detail on the revisions to the IoS components can be found in the RIOS1 tables in the data section of this publication.

According to the UK Standard Industrial Classification 2007 (SIC2007), industry 69.2 covers activities such as bookkeeping and the preparation or examination of financial accounts. It also covers tax consultancy, which includes both the preparation of tax returns (for individuals or businesses) and advisory activities, including representation on behalf of clients before tax authorities.

In 2012, the industry’s share of whole economy output and total intermediate consumption were roughly the same at 1.1% and 1.0% respectively (Second Estimate of GDP – Quarter 2 (Apr to June) 2015 and Input-Output Supply and Use tables, 2014 edition). Between 1997 and 2012, these shares have increased slightly, signalling stronger growth relative to the remainder of the economy.

This industry is included under the legal and accounting activities grouping within services, along with legal activities, which was examined in last month’s index of services release. It accounted for around 40% of the output of the legal and accounting activities grouping in 2014.

The performance of this industry was similar to that of the entire services industries between 1990 and 1996. However, it subsequently grew at a compound average annual growth rate of 6.4% between 1997 and 2007, a faster rate compared with a compound growth rate of 3.9% for the entire services industries. 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.

The economic downturn had a large impact on the industry, with output contracting by 11.5% between the economy’s peak in Quarter 1 (Jan to Mar) 2008 and the economy’s trough in Quarter 3 (July to Sept) 2009. In contrast, the entire services industry contracted by just 3.9% over the same period (Second Estimate of GDP – Quarter 2 (Apr to June) 2015). Between the 2008 and 2009 calendar years, the number of new accountancy businesses created fell by 3.4% while the number of accountancy firms that ceased to trade rose by 11.3%, coinciding with this contraction in output (Business Demography, 2013). In 2010, this industry started to recover strongly and in Quarter 2 (Apr to June) 2015 output was 18.9% above its pre-downturn peak (Second Estimate of GDP – Quarter 2 (Apr to June) 2015).

The services produced by this industry are often used in the production process (as intermediate consumption) by a wide range of industries and in 2012, this totalled around £15 billion. Around 35% of the intermediate consumption of the industry’s products can be attributed to just 5 industries, shown in Figure 6, which are all also within the services industries.

The industries which use the highest amount of its products as a share of their intermediate consumption are the legal activities and the architectural and engineering activities; technical testing and analysis industries (at 7.6% and 7.5% of their total intermediate consumption, respectively) (Input-Output Supply and Use tables, 2014 edition).

Between 1997 and 2012, the share of the 5 industries’ total intermediate consumption allocated to industry 69.2’s products was growing steadily with the exception of architectural and engineering activities (industry 71) which contracted quite sharply during the economic downturn (Input-Output Supply and Use tables, 2014 edition).