Index of Services, UK: August 2016

This publication covers August 2016, so the Index of Services release now covers two full months of data following the EU referendum. ONS has no evidence of a significant impact of the outcome of the EU referendum on August’s services output figures.

This release shows that services output increased by 0.2% between July 2016 and August 2016. Users should note that ONS always warns against focusing on the month-on-month growth rate.

The Index of Services was estimated to have increased by 3.2% in August 2016 compared with August 2015. 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 contribution to total growth came from business services and finance, which contributed 1.1 percentage points.

The 0.2% growth in services between July 2016 and August 2016 follows growth of 0.4% between June 2016 and July 2016, which is unrevised from the previous estimate.

In this release of data, the earliest period open to revision is July 2016.

As previously announced, from January 2017 we are improving the way we publish economic statistics in a number of ways:

We are publishing related data at the same time under new "theme" days. This will increase the coherence of our data releases and involve minor changes to the timing of certain publications. For more information see Changes to publication schedule for economic statistics. More work is needed to confirm whether it is possible for IoS to be released alongside the other short term output indicators or whether it will continue to be released alongside the National Accounts. As this work is ongoing there will be no changes to the IoS publication date in January

We are also improving the format and structure of statistical bulletins, which means they will be shorter and more insightful. To complement this, analysis that provides an over-arching economic picture of all the data published on each theme day will also be published.

About the IoS

The monthly Index of Services (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 services 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 78.8% of UK GDP in 2013.

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 the Office for National Statistics (ONS) measure and publish the sampling error associated with the estimate for many well-established statistics, 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 it.

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

Monthly 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 15.

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 report, available to download from the Index of Services methodology 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 (GDP). Index values are currently referenced to 2013 so that the average for 2013 is equal to 100. Therefore, an index value of 110 would indicate that output is 10% higher than the average for 2013.

The data content of this estimate is around 45% of the total required for the final August services estimate. The remaining 55% is modelled at this stage.

As seen in Figure 1, the IoS increased by 3.2% in August 2016 compared with August 2015. In order of their contribution to growth (listed in Table IOS1 in the Index of Services ̶ publication tables dataset):

• business services and finance increased by 2.8%
• distribution, hotels and restaurants increased by 5.8%
• transport, storage and communication increased by 4.0%
• government and other services increased by 1.8%

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

Between July 2016 and August 2016, as seen in Figure 2, IoS output increased by 0.2%.

Out of the 4 main components of the services industries, 3 increased in the most recent month compared with the previous month. In order of their contribution to growth (listed in Table IOS1 in the Index of Services ̶ publication tables dataset):

• distribution, hotels and restaurants increased by 1.0%
• transport, storage and communication increased by 0.4%
• business services and finance increased by 0.1%

Output of government and other services decreased by -0.1%.

More detail on individual components can be found in the Index of Services ̶ publication tables dataset. The tables also provide information on the growth for the 3 months ending August 2016 compared with the previous 3 months and compared with the 3 months ending August 2015.

Total services grew by 2.7% between Quarter 2 (Apr to June) 2015 and Quarter 2 2016 and by 0.6% between Quarter 1 (Jan to Mar) 2016 and Quarter 2 2016. This compares with growth rates of 2.1% and 0.7% respectively for the economy as a whole.

Since 1997, the services industries as a whole have grown at a faster rate than all other headline industries. While gross domestic product (GDP) has grown at a compound average growth rate (further information on compound average growth can be found in background note 11) of 2.0% per year from 1998 to 2015, services have grown at a compound average growth rate of 2.6% per year. (More information can be found in (Gross Domestic Product Preliminary Estimate: Quarter 3 (July to Sept) 2016). 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: Apr to June 2016). The higher output growth therefore reflects the increasing share of the labour force employed in services, which grew from 73% to 80% between 1997 and 2015 (UK Labour Market: October 2016).

In addition to strong long-run growth, the services industries as a whole were also less affected by the downturn (between 2008 and 2009) than other headline industries, such as production and construction. Following the downturn, the relatively strong growth in the services industries has provided the largest contribution to the recovery (as of Quarter 2 2016, total services is 11.3% above its pre-downturn peak in Quarter 1 2008). More information can be found in Gross Domestic Product Preliminary Estimate: Quarter 3 (July to Sept) 2016.

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 from 1998 to 2015, transport, storage and communication, and business services and finance grew faster than the services industries as a whole, at compound average growth rates of 4.0% and 3.2% per year respectively. Meanwhile, total services grew at a compound average growth rate of 2.6% per year over the same period. However, government and other services, and distribution, hotels and restaurants grew at slower rates (at compound average growth rates of 1.5% and 1.9% per year respectively).

The economy’s downturn, Quarter 1 2008 to Quarter 2 2009, affected the 4 sub-components of the services industries to different degrees. Distribution, hotels and restaurants, and transport, storage and communication were affected the most, with their output falling by 9.4% and 9.3% respectively, while the output of the services industries as a whole contracted by 4.6% over the same period.

Business services and finance, and government and other services were impacted less severely, with their output contracting by 3.9% and 0.3% respectively.

Business services and finance experienced a strong recovery following the economy’s downturn and in Quarter 2 2016, output was 13.5% above the level in Quarter 1 2008. The recoveries of transport, storage and communication, and distribution, hotels and restaurants were also strong and in Quarter 2 2016 output was 11.9% and 12.9% above their respective levels in Quarter 1 2008. However, the recovery of the government and other services industries was more modest and in Quarter 2 2016, output was 7.1% above its Quarter 1 2008 value.

Figure 4 shows the share of nominal (unadjusted for the effect of price changes) gross value added (GVA) 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 nominal GVA accounted for by services in the UK was just under 72%, in the top half of the range relative to the other economies shown. By 2014 the UK had become relatively more reliant on services, as its share rose to over 79% of nominal GVA.

With a weight of 78.8%, the services industries are the largest industrial grouping in the output approach to measuring gross domestic product (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 Sept) 2016, 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 latest estimates for production, construction and retail sales were published on 7 October 2016, 14 October 2016 and 20 October 2016 respectively. The Gross Domestic Product preliminary estimate: Quarter 3 (July to Sept) 2016 was published on 27 October 2016 alongside this bulletin.

Distribution, hotels and restaurants

The index of distribution, hotels and restaurants increased by 5.8% in August 2016 compared with August 2015; this follows an increase of 4.4% in July 2016 compared with the same month a year earlier. The main contributors to the increase were: retail trade except of motor vehicles and motorcycles, which increased by 6.5%, and wholesale and retail trade and repair of motor vehicles and motorcycles, which increased by 10.9%.

Transport, storage and communication

The index of transport, storage and communication increased by 4.0% in August 2016 compared with August 2015; this follows an increase of 4.1% in July 2016 compared with the same month a year earlier. The main contributors to the increase were: computer programming, consultancy and related activities, which increased by 11.3%, and publishing, audiovisual and broadcasting activities, which increased by 12.6%.

Business services and finance

The index of business services and finance increased by 2.8% in August 2016 compared with August 2015; this follows an increase of 2.5% in July 2016 compared with the same month a year earlier. The main contributors to the increase were: other professional service activities, which increased by 5.8%, and administrative and support services activities, which increased by 3.2%.

Government and other services

The index of government and other services increased by 1.8% in August 2016 compared with August 2015; this follows an increase of 1.8% in July 2016 compared with the same month a year earlier. The main contributors to the increase were: human health and social work activities, which increased by 2.9%, and other service activities, which increased by 7.5%.

Revisions

The Index of Services (IoS) follows 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
• 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 methodology page.

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

In this release of data, the earliest period open to revision is July 2016.

Further details on the revisions to the IoS components can be found in the RIOS1 tables in the Index of Services ̶ publication tables dataset.

According to the UK Standard Industrial Classification 2007 (SIC 2007), scientific research and development (industry 72) includes three research and development (R and D) activities – basic research, applied research and experimental development. These R and D activities can be split into two categories: natural sciences and engineering, and social sciences and the humanities.

Gross value added (GVA) in this industry is calculated as a combination of research funding (for example, grants, donations, investments) and firm turnover, plus a measure based on workforce jobs for non-market activity. As jobs are used as a proxy for output some caution should be given to comparisons of current price and volume data.

Figure 6 shows that scientific research and development has outperformed total services since 1997 (in volume terms). From Quarter 2 (Apr to June) 1997 to Quarter 1 (Jan to Mar) 2008, the industry grew at a compound average growth rate of 1.8% per quarter compared with 0.9% for services as a whole (further information on compound average growth can be found in background note 11).

During the economy’s downturn between Quarter 1 2008 and Quarter 2 2009, the output of total services contracted by 4.6%, while scientific research and development experienced a milder decline, contracting by 2.9% over the same period.

Since reaching a trough in Quarter 4 (Oct to Dec) 2009 the industry has grown at a much faster compound average growth rate than total services (1.4% per quarter for the industry and 0.6% for services). By Quarter 2 2016, the industry was 29.9% above its pre-downturn peak value (in Quarter 4 2007), while total services was 11.3% above its value in Quarter 1 2008.

Some general information on the quality of the Index of Services (IoS) can be found in the Understanding the Index of Services section in the main part of this statistical bulletin.

The Index of Services Quality and Methodology Information document contains important information on:

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

Further quality and methodology information, including details of the quality adjustments process for IoS, was published on 31 October 2014 and can be found on the Index of Services methods page on our website.