Index of Services, UK: July 2015

• This release of data is consistent with the Quarterly National Accounts released on 30 September 2015 and data used for Blue Book 2015 due for release on 30 October 2015. The last year of chain-linked weights has been updated from 2011 to 2012 and the reference year has also changed from 2011 to 2012. In line with normal practice for this annual update, seasonal models have also been reviewed and amended where necessary

• The Index of Services is estimated to have increased by 2.8% in July 2015 compared with July 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 1.2 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 0.2% between June 2015 and July 2015, following an increase of 0.6% between May 2015 and June 2015

• The Index of Services increased by 0.6% in Quarter 2 (Apr to June) 2015 compared with Quarter 1 (Jan to Mar) 2015

• This figure has been revised down by 0.1 percentage points from that included in the Second Estimate of Gross Domestic Product (GDP), published on 28 August 2015 and is consistent with the Quarterly National Accounts published on 30 September 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 January 1997

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 78.6% of UK GDP in 2012.

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 12.

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 18.

It should be noted that care should be taken when using the month-on-month growth rates, due to their volatility (background note 11).

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 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.

As seen in Figure 1, the IoS increased by 2.8% in July 2015 compared with July 2014. In order of their contribution to growth (listed in reference table IOS1):

1. business services and finance increased by 3.0%

2. distribution, hotels and restaurants increased by 4.6%

3. transport, storage and communication increased by 5.6%

4. government and other services increased by 0.2%

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

Between June 2015 and July 2015, as seen in Figure 2, the IoS increased by 0.2%.

Out of the 4 main components of the services industries, 2 increased in the most recent month compared with the previous month. In order of their contribution to growth (listed in reference table IOS1):

1. transport, storage and communication increased by 0.8%

2. business services and finance increased by 0.1%

Both the business services and finance component and the distribution, hotels and restaurants component remained flat with a change of 0.0%.

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 July 2015 compared with the previous 3 months and compared with the 3 months ending July 2014.

Total services grew by 2.7% between Quarter 2 (Apr to June) 2014 and Quarter 2 (Apr to June) 2015, and by 0.6% between Quarter 1 (Jan to Mar) 2015 and Quarter 2 (Apr to June) 2015. This is compared with growth rates of 2.4% and 0.7% respectively for the economy as a whole.

Since 1997, the services industries have grown at a faster rate than all other headline industries. While GDP has grown at a compound average annual growth rate of 2.0% since 1997, services has grown at a compound average growth rate of 2.8% per year (more information can be found in Quarterly National Accounts, 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% to 79% between 1997 and 2014 (Labour Market Statistics, September 2015, reference table EMP13).

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. Relatively strong growth in the services industries has provided the largest contribution to the recovery in the whole economy and has been the only industry grouping to have surpassed its pre-downturn peak levels (more information can be found in Quarterly National Accounts, Quarter 2 (Apr to June) 2015).

Even though the entire services industries have been performing better than all other headline industries, the growth within the services’ sub-components has been quite varied. Figure 3 shows that between 1997 and 2014, transport, storage and communications, and business services and finance grew faster than the entire services industries at compound average growth rates of 3.7% and 3.8% per annum respectively, while the entire services industries grew at a compound average growth rate of 2.8% per year over the same period. However, government and other services, and distribution, hotels and restaurants grew at a slower rate than the entire services industries (1.7% and 1.8% per annum respectively) between 1997 and 2014.

The economic downturn, Quarter 1 (Jan to Mar) 2008 to Quarter 2 (Apr to June) 2009, impacted the 4 sub-components of the entire services industries to a different degree. Distribution, hotels and restaurants, and transport, storage and communications were affected the most, with their output falling by 9.1% and 7.5% respectively, while the output of the entire services industries contracted by 4.1% over the same period. Business services and finance and government and other services were impacted less severely, with their output contracting by 3.5% and 0.1% respectively.

Business services and finance, and transport, storage and communications recovered very strongly following the economic downturn and in Quarter 2 (Apr to June) 2015 they were 13.9% and 10.0% above their respective values in Quarter 1 (Jan to Mar) 2008. The recovery of distribution, hotels and restaurants was also quite strong and in Quarter 2 (Apr to June) 2015 output was 8.9% above pre-downturn levels. However, the recovery of the government and other services industries was more modest, with output currently being 6.5% above Quarter 1 (Jan to Mar) 2008 values.

Figure 4 shows the share of gross value added accounted for by services 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 gross value added (GVA) accounted for by services in the UK was just under 70% of nominal GVA, around the middle of the range relative to the other economies shown. By 2013, the UK had become relatively more reliant on services, as its share rose to almost 80% of nominal GVA.

With a weight of 78.6%, 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 July 2015 estimates for production and construction were published on 9 September 2015 and 11 September 2015 respectively. The Quarterly National Accounts for Quarter 2 (Apr to June) 2015 was published on 30 September 2015 alongside this bulletin.

Distribution, hotels and restaurants

The index of distribution, hotels and restaurants increased by 4.6% in July 2015 compared with July 2014, following an increase of 4.8% in June 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 3.9%; wholesale and retail trade and repair of motor vehicles and motorcycles, which rose by 9.4%; and accommodation, which rose by 15.0%.

Transport, storage and communication

The index of transport, storage and communication increased by 5.6% in July 2015 compared with July 2014, following an increase of 5.3% in June 2015 compared with the same month a year earlier. The main contributors to the increase were: publishing, audiovisual and broadcasting activities, which rose by 17.8%; computer programming, consultancy and related activities, which rose by 7.6%; and telecommunications, which rose by 2.9%.

Business services and finance

The index of business services and finance increased by 3.0% in July 2015 compared with July 2014, following an increase of 3.4% in June 2015 compared with the same month a year earlier. The main contributors to the increase were: other professional service activities, which rose by 5.4%; administrative and support services activities, which rose by 4.9%; and real estate activities, which rose by 1.7%.

Government and other services

The index of government and other services increased by 0.2% in July 2015 compared with July 2014, following an increase of 0.4% in June 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 1.7%; other service activities, which rose by 1.4%; and education, which rose by 0.3%.

Revisions

The Index of Services (IoS) follows 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

• 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 January 1997 as this dataset contains the annual updates which will be included in the Blue Book 2015, published in October 2015.

There are numerous sources of revision which will affect services in the Blue Book 2015 publication, including but not limited to:

• updates to the annual gross value added weights

• updated source data

• improved statistical methods

• alignment to GDP annual growths

As is common for the first Index of Services publication following the annual updates, there are more and larger revisions than an ordinary publication.

Further information on improvements to the output approach to measuring GDP and revisions can be found in the GDP Output Improvement Report.

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 70 includes the activities of head office and management consultancy activities. This industry covers the provision of advice and assistance to businesses and other organisations on management issues, financial planning and budgeting, marketing objectives and policies, human resource policies, practices and planning, and production scheduling and control planning. Further to this, it also includes the overseeing and managing of other units of the same company or enterprise, that is the activities of head offices.

Industry 70 is divided into 2 divisions: activities of head office (division 70.1) and management consultancy activities (division 70.2) which accounts for the majority of turnover for the industry (91.7%) (Annual Business Survey). In 2013, this industry generated £54.5 billion of turnover, which represented 23.9% of the turnover of the professional, scientific and technical activities section (section M) (Annual Business Survey). Moreover, the share of total output attributed to industry 70 increased from 0.4% in 1997 to 1.2% in 2013, signalling a strong growth rate relative to the rest of the economy (Quarterly National Accounts, Quarter 2 (Apr to June) 2015).

Industry 70 has performed better than the entire services industries since 1997. Between Quarter 1 (Jan to Mar) 1997 and Quarter 1 (Jan to Mar) 2008 this industry experienced relatively strong continuous growth, rising at a compound growth rate of 3.5% per quarter while the services industries grew at a compound growth rate of 0.9% per quarter over the same period. During the economic downturn, Quarter 1 (Jan to Mar) 2008 to Quarter 2 (Apr to June) 2009, the output of the entire services industries and industry 70 contracted at different times and to different extents. Services started to contract in Quarter 2 (Apr to June) 2008, and output fell by 4.1% between the industries peak in Quarter 1 (Jan to Mar) 2008 and the industries trough in Quarter 2 (Apr to June) 2009. However, industry 70 started to contract 3 quarters later (Quarter 1 (Jan to Mar) 2009) and output decreased by 23.9% between the industry’s peak in Quarter 4 (Oct to Dec) 2008 and its trough in Quarter 4 (Oct to Dec) 2009.

Industry 70 and the services industries recovered strongly following their respective periods of contraction. The entire services industries surpassed its pre-downturn peak by Quarter 1 (Jan to Mar) 2012 while industry 70 did not recover to its pre-contraction peak until Quarter 2 (Apr to June) 2013. By Quarter 2 (Apr to June) 2015, industry 70 and the entire services industries were 16.9% and 10.2% above their respective peaks.

Between 2009 and 2014, the total number of employees in industry 70 increased by 45.5%, from 494,200 employees to 719,100 employees (Business register and employment survey (BRES)). This increase reflected rises in the number of both full-time and part-time employees. The growth in the number of employees working part-time and full-time was roughly the same at 45.9% and 45.4%, respectively (Business register and employment survey (BRES)). The broad trend of the number of part-time and full-time employees growing at a similar rate is consistent with the behaviour of the labour market as a whole between 2009 and 2014, where the number of part-time employees grew by 3.9% while the number of full-time employees grew by 3.2% (for more information, please visit Labour Market Statistics, September 2015).

As seen in Figure 7, in 2014 the vast majority (98.0%) of those working in industry 70 were employed by the private sector. Between 2009 and 2014, the number of employees working in the private sector in this industry increased by 226,100, while it decreased by 1,300 in the public sector over the same period. The decrease in the total number of employees working in the public sector in this industry was driven by a fall in full time employees by 1,600 between 2009 and 2014. This was partly offset by a 300 rise in the number of part time employees working in the public sector over the same period (for more information, please visit Business register and employment survey (BRES)).