Index of Services, UK: August 2015

• This release of data is consistent with the Gross Domestic Product Preliminary Estimate Quarter 3 (July to Sep) 2015 released on 27 October 2015

• The Index of Services is estimated to have increased by 2.8% in August 2015 compared with August 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 0.7 percentage points to total growth

• The latest Index of Services estimates show that output was flat between July 2015 and August 2015, following an increase of 0.2% between June 2015 and July 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 July 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 78.6% 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 11.

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 11.

It should be noted that care should be taken when using the month-on-month growth rates, due to their volatility (background note 10).

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 August 2015 compared with August 2014. In order of their contribution to growth (listed in reference table IOS1):

1. business services and finance increased by 3.5%

2. distribution, hotels and restaurants increased by 3.9%

3. transport, storage and communication increased by 4.7%

4. government and other services increased by 0.1%

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

Between July 2015 and August 2015, as seen in Figure 2, IoS output was flat.

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. business services and finance increased by 0.2%

2. transport, storage and communication increased by 0.2%

In contrast, distribution, hotels and restaurants decreased by 0.4%, while government and other services decreased 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 August 2015 compared with the previous 3 months and compared with the 3 months ending August 2014.

Output in the services industries grew by 2.8% between August 2014 and August 2015 but was broadly unchanged between July 2015 and August 2015.

Since 1997, the services industries as a whole 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 have grown at a compound average growth rate of 2.8% per year (more information can be found in Gross Domestic Product: Preliminary Estimate - Quarter 3 (July to Sep) 2015). This has led to a continuing re-orientation of the economy towards services, despite productivity in the services industries as a whole rising more slowly than in the production industries (and manufacturing in particular) since 1997 (more information can be found in Labour Productivity, Quarter 2 (Apr to June) 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, October 2015, reference table EMP13).

In addition to strong long-run growth, the services industries as a whole 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 headline industry grouping to have surpassed its pre-downturn peak levels (more information can be found in Gross Domestic Product: Preliminary Estimate - Quarter 3 (July to Sep) 2015).

Even though the services industries as a whole 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 services industries as a whole at compound average growth rates of 3.7% and 3.8% per year respectively, while services 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 services industries as a whole (1.7% and 1.8% per year respectively) between 1997 and 2014.

The economy’s downturn, Quarter 1 (Jan to Mar) 2008 to Quarter 2 (Apr to June) 2009, impacted the 4 sub-components of the 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 services industries as a whole 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 communication recovered very strongly following the economy’s 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, and in Quarter 2 (Apr to June) 2015, output was 6.5% above its Quarter 1 (Jan to Mar) 2008 value.

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 78% 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 3 (July to Sep) 2015, GDP was estimated to have increased by 0.5% 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 August 2015 estimates for production and construction were published on 7 October 2015 and 9 October 2015 respectively. The Gross Domestic Product Preliminary Estimate Quarter 3 (July to Sep) 2015 release was published on 27 October 2015 alongside this bulletin.

Distribution, hotels and restaurants

The index of distribution, hotels and restaurants increased by 3.9% in August 2015 compared with August 2014, following an increase of 4.9% in July 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 3.6%; and wholesale and retail trade and repair of motor vehicles and motorcycles, which rose by 7.6%.

Transport, storage and communication

The index of transport, storage and communication increased by 4.7% in August 2015 compared with August 2014, following an increase of 4.9% in July 2015 compared with the same month a year earlier. The main contributors to the increase were: publishing, audiovisual and broadcasting activities, which rose by 13.5%; and computer programming, consultancy and related activities, which rose by 7.2%.

Business services and finance

The index of business services and finance increased by 3.5% in August 2015 compared with August 2014, following an increase of 3.0% in July 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 5.5%; and real estate activities, which rose by 2.3%.

Government and other services

The index of government and other services increased by 0.1% in August 2015 compared with August 2014, following an increase of 0.2% in July 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 1.4%; and education, which rose by 0.4%.

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 17.

In this release of data, the earliest period open to revision is July 2015. The growth rate for July 2015 compared with July 2014 (2.8%) was unrevised. The month on month growth rate for July 2015 compared with June 2015 (0.2%) was also unrevised.

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), advertising and market research (industry 73) includes the creation of advertising campaigns and placement of such advertising in periodicals, newspapers, radio, television or other media, as well as the design of display structures and sites.

This industry is divided into 2 divisions: advertising (division 73.1) and market research and public opinion polling (division 73.2) with the former accounting for 84.9% of the industry’s turnover in 2013 (Annual Business Survey). In 2013, advertising and market research generated £26.9 billion of turnover, which represented 11.8% of the turnover of the professional, scientific and technical activities section (section M) (Annual Business Survey). The share of total output attributed to this industry increased slightly between 1997 and 2013 from 0.5% to 0.6%, suggesting that the industry grew slightly faster than the rest of the economy (Gross Domestic Product: Preliminary Estimate - Quarter 3 (July to Sep) 2015).

In the period from 1997 to 2015, advertising and market research generally underperformed compared with the services industries as a whole. Between Quarter 1 (Jan to Mar) 1997 and Quarter 1 (Jan to Mar) 2008 this industry experienced some volatility but it followed a broadly upward trend growing at a compound rate of 0.4% per quarter, while services experienced more steady growth at a compound rate of 0.9% per quarter over the same period. During the economy’s downturn, Quarter 1 (Jan to Mar) 2008 and Quarter 2 (Apr to June) 2009, the output of the services industries as a whole and advertising and market research contracted at different times and to different extents. Services started to contract in Quarter 2 (Apr to June) 2008, and its output fell by 4.1% between the industries’ peak in Quarter 1 (Jan to Mar) 2008 and its trough in Quarter 2 (Apr to June) 2009. However, advertising and market research did not begin its downturn until Quarter 3 (July to Sep) 2008, and its output decreased by 17.9% between the industry’s peak in Quarter 2 (Apr to June) 2008 and its trough in Quarter 3 (July to Sep) 2009.

Advertising and market research and the services industries as a whole recovered strongly following their respective periods of contraction. Following the economy’s downturn, services returned to relatively strong and consistent growth at a compound growth rate of 0.6% per quarter between Quarter 3 (July to Sep) 2009 and Quarter 2 (Apr to June) 2015. In contrast, advertising and market research experienced some fluctuation in its growth over the same period, but the industry’s output grew at a much faster rate (a compound growth rate of 1.7% per quarter). The services industries as a whole surpassed its pre-downturn peak by Quarter 1 (Jan to Mar) 2012 while advertising and market research recovered to its pre-contraction peak by Quarter 2 (Apr to June) 2011. By Quarter 2 (Apr to June) 2015, advertising and market research and the services industries were 21.6% and 10.2% above their respective peaks.

Advertising and market research are often used in the production process (as intermediate consumption) by a wide range of industries; in 2012 this totalled around £25.1 billion. Around 10.5% of the intermediate consumption of this industry’s products can be attributed to the 5 industries, shown in Figure 7.

In 2012 the industries which used the highest amount of advertising and market research products as a share of their total intermediate consumption were publishing activities and manufacture of tobacco products at 8.4% and 7.6% of their total intermediate consumption, respectively (Input-Output Supply and Use tables, 2014 edition).

Between 1997 and 2012, the shares of the 5 industries’ total intermediate consumption allocated to this industry’s products followed different paths. Manufacture of grain mill products, starches and starch products (industry 10.6) saw a consistent reduction in its share of total intermediate consumption devoted to advertising and market research from 7.3% in 1997 to 5.7% in 2012. However, between 1997 and 2008 manufacture of tobacco products (industry 12), publishing activities (industry 58) and activities of membership organisations (industry 94) increased their consumption of the industry’s products by 3.9 percentage points, 0.7 percentage points and 3.5 percentage points, respectively. During the economy’s downturn their share of total intermediate consumption allocated to advertising and market research fell and continued to decline in 2012. (Input-Output Supply and Use tables, 2014 edition).