Index of Services, UK: March 2016

The Index of Services is estimated to have increased by 2.6% in March 2016 compared with March 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 0.9 percentage points.

The latest Index of Services estimates show that output decreased by 0.1% between February 2016 and March 2016. This follows growth of 0.1% between January 2016 and February 2016.

The Index of Services increased by 0.6% in Quarter 1 (Jan to Mar) 2016 compared with Quarter 4 (Oct to Dec) 2015. This figure was unrevised from the estimate used in the gross domestic product (GDP) preliminary estimate, published on 27 April 2016. This figure is consistent with the Second Estimate of GDP, published on 26 May 2016.

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 2016.

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 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 communications
• 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 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 report on 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 GDP. Index values are currently 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 2.6% in March 2016 compared with March 2015. In order of their contribution to growth (listed in Table IOS1 in the Index of Services publication tables dataset):

1. business services and finance increased by 2.2%
2. distribution, hotels and restaurants increased by 4.2%
3. government and other services increased by 1.6%
4. transport, storage and communications increased by 3.3%

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

Between February 2016 and March 2016, as seen in Figure 2, IoS output decreased by 0.1%.

Out of the 4 main components of the services industries, transport storage and communication was the only component to decrease, decreasing by 1.2% in the most recent month compared with the previous month.

In contrast, the remaining 3 components increased. In order of their contribution to growth (listed in Table IOS1 in the Index of Services publication tables dataset):

1. business services and finance increased by 0.1%
2. government and other services increased by 0.1%
3. distribution, hotels and restaurants increased 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 in March 2016 compared with the previous 3 months and compared with the 3 months ending March 2015.

Total services grew by 2.7% between Quarter 1 (Jan to Mar) 2015 and Quarter 1 (Jan to Mar) 2016 and by 0.6% between Quarter 4 (Oct to Dec) 2015 and Quarter 1 (Jan to Mar) 2016. This compares with growth rates of 2.0% and 0.4% 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 GDP has grown at a compound average (further information on compound average growth can be found in background note 12) growth rate of 2.0% per year from 1998 to 2015, services have grown at a compound average growth rate of 2.8% per year (more information can be found in Second Estimate of GDP: Quarter 1 (Jan to Mar) 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: Oct to Dec 2015). 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: May 2016).

In addition to strong long-run growth, the services industries as a whole were also less affected by the downturn (between 2007 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 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 Second Estimate of GDP: Quarter 1 (Jan to Mar) 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 communications and business services and finance grew faster than the services industries as a whole, both at compound average growth rates of 3.7% per year, 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 slower rates than the services industries as a whole (at compound average growth rates of 1.6% and 1.9% per year respectively) from 1998 to 2015.

The economy’s downturn, Quarter 1 (Jan to Mar) 2008 to Quarter 2 (Apr to June) 2009, affected the 4 sub-components of the services industries to different degrees. 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 experienced a strong recovery following the economy’s downturn and in Quarter 1 (Jan to Mar) 2016, output was 15.6% above pre-downturn levels. The recoveries of transport, storage and communications, and distribution, hotels and restaurants were also strong and in Quarter 1 (Jan to Mar) 2016, output was 12.9% and 12.7% above their respective levels in Quarter 1 (Jan to Mar) 2008. However, the recovery of the government and other services industries was more modest and in Quarter 1 (Jan to Mar) 2016, output was 8.5% above its Quarter 1 (Jan to Mar) 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 70%, around the middle 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 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 1 (Jan to Mar) 2016, GDP was estimated to have increased by 0.4% 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 March 2016 estimates for production and construction were published on 11 May 2016 and 13 May 2016 respectively. The Second Estimate of GDP for Quarter 1 (Jan to Mar) 2016 was published on 26 May 2016 alongside this bulletin.

Distribution, hotels and restaurants

The index of distribution, hotels and restaurants increased by 4.2% in March 2016 compared with March 2015; this follows an increase of 4.6% in February 2016 compared with the same month a year earlier. The main contributors to the increase were: wholesale and retail trade and repair of motor vehicles and motorcycles, which increased by 13.8% and retail trade, except of motor vehicles and motorcycles, which increased by 3.6%.

Transport, storage and communication

The index of transport, storage and communications increased by 3.3% in March 2016 compared with March 2015; this follows an increase of 3.5% in February 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 8.5% and publishing audiovisual and broadcasting activities, which increased by 12.3%.

Business services and finance

The index of business services and finance increased by 2.2% in March 2016 compared with March 2015; this follows an increase of 2.3% in February 2016 compared with the same month a year earlier. The main contributors to the increase were: other professional service activities, which increased by 4.5%, real estate activities, which increased by 1.9% and administrative and support service activities, which increased by 2.3%.

Government and other services

The index of government and other services increased by 1.6% in March 2016 compared with March 2015; this follows an increase of 1.4% in February 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 3.4%, education, which increased by 2.1% and other service activities, which increased by 3.5%.

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 1 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 January 2016. The growth rate for January 2016 compared with the same month a year earlier was revised up by 0.1 percentage points from the previous estimate of 2.8%, and the month-on-month growth rate for January 2016 compared with December 2015 was revised up 0.1 percentage points from the previous estimate of 0.1%. The growth rate for February 2016 compared with the same month a year earlier was revised up by 0.1 percentage points from the previous estimate of 2.5%. The month-on-month growth rate was unrevised.

Despite the unrevised quarter growth, the March Index of Services month-on-month growth was weaker than the March assumption in the Preliminary Estimate.

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), security and investigation activities (industry 80) includes the provision of security-related services such as: investigation and detective services; guard and patrol services; and the transportation of valuables. It also includes the operation, sale and repair of electronic security alarm systems such as burglar and fire alarms.

In 2015, security and investigation activities generated £3.4 billion of output gross value added (GVA) in current price terms, which represented 4.2% of the GVA in the administrative and support activities section (section N). The share of total output attributed to this industry increased slightly between 1997 and 2015 from 0.1% to 0.2%, suggesting that the industry grew slightly faster than the rest of the economy (Second Estimate of GDP: Quarter 1 (Jan to Mar) 2016).

Figure 6 shows that security and investigation activities has slightly outperformed the services industries, although it has experienced significant volatility. From Quarter 2 (Apr to June) 1997 to Quarter 1 (Jan to Mar) 2008, security and investigation activities grew faster than services as a whole at a compound average growth rate of 1.5% per quarter, compared with a compound average growth rate of 0.9% per quarter for the services industries (further information on compound average growth can be found in background note 12).

During the economy’s downturn between Quarter 1 (Jan to Mar) 2008 and Quarter 2 (Apr to June) 2009, the output of the services industries contracted by 4.1%. In contrast, security and investigation activities contracted over a slightly longer period, falling by 13.3% between Quarter 1 (Jan to Mar) 2008 and its trough in Quarter 3 (July to Sept) 2009.

Services then returned to strong and consistent growth, surpassing its pre-downturn peak in Quarter 1 (Jan to Mar) 2012. In contrast, security and investigation activities saw much more volatile growth, although it grew faster than services as a whole. By Quarter 1 (Jan to Mar) 2016 the services industries as a whole were 12.6% above their value in Quarter 1 (Jan to Mar) 2008, while security and investigation activities was 20.9% above its value in Quarter 1 (Jan to Mar) 2008.

In the post-downturn period (between 2010 and 2015) the volume of security and investigation activities grew by 6.9%, coinciding with a 2.3% decrease in the number of employee jobs in the industry. Over the same period, the number of employee jobs worked by men decreased by 4.6%, with their gross median weekly pay rising by 8.7%. Over the same period the number of employee jobs occupied by women increased by 8.9% with their gross median weekly pay rising by 11.1%. Despite an increase in the number of female employees and a decrease in male employees, the latter continue to make up the larger proportion of workers in the industry (80.7% in 2015) (UK Labour Market: May 2016 and Annual Survey of Hours and Earnings: 2015 Provisional Results).