Index of Services, UK: October 2015

• The Index of Services is estimated to have increased by 2.1% in October 2015 compared with October 2014. Three of the 4 main components of the services industries increased in the most recent month compared with the same month a year ago, while 1 decreased

• The largest contribution to total growth came from: distribution, hotels and restaurants, which contributed 0.9 percentage points; in contrast, government and other services had a slight negative contribution

• The latest Index of Services estimates show that output increased by 0.1% between September 2015 and October 2015, following growth of 0.5% between August 2015 and September 2015

• The Index of Services increased by 0.6% in Quarter 3 (July to Sept) 2015 compared with Quarter 2 (Apr to June) 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 27 November 2015 and is consistent with the Quarterly National Accounts, published on 23 December 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 2014

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 17.

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 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 2.1% in October 2015 compared with October 2014. In order of their contribution to growth (listed in reference table IOS1):

1. distribution, hotels and restaurants increased by 5.1%

2. business services and finance increased by 2.0%

3. transport, storage and communications increased by 3.4%

In contrast government and other services decreased by 0.1%

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

Between September 2015 and October 2015, as seen in Figure 2, IoS output increased by 0.1%.

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 reference table IOS1):

1. distribution, hotels and restaurants increased by 0.5%

2. business services and finance increased by 0.1%

3. transport, storage and communications increased by 0.2%

In contrast, 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 October 2015 compared with the previous 3 months and compared with the 3 months ending October 2014.

Total services grew by 2.4% between Quarter 3 (July to Sept) 2014 and Quarter 3 (July to Sept) 2015 and by 0.6% between Quarter 2 (Apr to June) 2015 and Quarter 3 (July to Sept) 2015. This was slightly faster than the growth rates of 2.1% 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 11) 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 Quarterly National Accounts – Quarter 3 (July to Sept) 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 3 (July to Sept) 2015). The higher output growth, therefore, reflects the increasing share of the labour force employed in services, which grew from 73% to 79% between 1997 and 2014 (Labour Market Statistics, December 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 headline 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 Quarterly National Accounts – Quarter 3 (July to Sept) 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, 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 a slower rate than the services industries as a whole (at compound average growth rates of 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 communications recovered very strongly following the economy’s downturn and in Quarter 3 (July to Sept) 2015, they were 14.2% and 11.0% 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 3 (July to Sept) 2015, output was 9.8% above pre-downturn levels. However, the recovery of the government and other services industries was more modest, and in Quarter 3 (July to Sept) 2015, output was 6.9% 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 Sept) 2015, 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 October 2015 estimates for production and construction were published on 8 December 2015 and 11 December 2015 respectively. Quarterly National Accounts for Quarter 3 (July to Sept) 2015 was published on 23 December 2015 alongside this bulletin.

Distribution, hotels and restaurants

The index of distribution, hotels and restaurants increased by 5.1% in October 2015 compared with October 2014, this follows an increase of 4.7% in September 2015 compared with the same month a year earlier. The largest contribution to the increase was retail trade, except of motor vehicles and motorcycles, which increased by 3.8% and wholesale and repair of motor vehicles and motorcycles, which increased by 10.2%.

Transport, storage and communications

The index of transport, storage and communications increased by 3.4% in October 2015 compared with October 2014; this follows an increase of 4.1% in September 2015 compared with the same month a year earlier. The main contributors to the increase were: publishing, audiovisual and broadcasting activities, which increased by 11.6% and computer programming, consultancy and related activities, which increased by 4.5%.

Business services and finance

The index of business services and finance increased by 2.0% in October 2015 compared with October 2014; this follows an increase of 2.6% in September 2015 compared with the same month a year earlier. The main contributors to the increase were: administrative and support services activities, which increased by 5.0% and real estate activities, which increased by 2.2%.

Government and other services

The index of government and other services decreased by 0.1% in October 2015 compared with October 2014; this follows an increase of 0.1% in September 2015 compared with the same month a year earlier. The main contributors to the decrease were: public administration and defence; compulsory social security, which decreased by 2.8% and other service activities, which decreased by 2.4%.

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 January 2014. Across the open period there are small revisions to the month-on-month growth rates, the maximum absolute change is 0.1 percentage points. The cumulative effect of these revisions has led to some slightly larger increases to the month-on-year-ago revisions which can be found in the full revisions analysis.

In the most recent months, the month-on-month growth rate revisions are:

• August 2015 compared with July 2015 has been revised down 0.1 percentage points from the previously published estimate (0.0%)

• September 2015 compared with August 2015 has been revised up 0.1 percentage points from the previously published estimate (0.4%)

In addition to usual factors, revisions reflect the availability of a number of 2014 annual benchmark series in the current production round.

Further details 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), information service activities (industry 63) includes the activities of web search portals, data processing and hosting activities, as well as other activities that primarily supply information. This industry has 2 divisions: data processing, hosting and related activities; web portals (division 63.1) and other information service activities (division 63.9).

In 2014, information service activities generated £5.1 billion of output gross value added (GVA) in current prices, which represented 5.1% of the GVA in the information and communication section (section J). The share of total output attributed to this industry increased between 1997 and 2014 from 0.2% to 0.3%, suggesting that the industry grew faster than the rest of the economy (Quarterly National Accounts – Quarter 3 (July to Sept) 2015).

Figure 6 shows that in the period from 1997 to 2015, information service activities performed better than the services industries as a whole. Between Quarter 1 (Jan to Mar) 1997 and Quarter 1 (Jan to Mar) 2008 this industry followed a broadly upward but volatile trend growing at a compound average growth rate of 2.4% per quarter. The industry’s (pre-downturn) upward trend consisted of 2 distinct periods, high and steady growth between Quarter 1 (Jan to Mar) 1997 and Quarter 4 (Oct to Dec) 2000, followed by slower and more volatile growth between Quarter 4 (Oct to Dec) 2000 and Quarter 1 (Jan to Mar) 2008. Services experienced slower growth (a compound average growth rate of 0.9% per quarter) over the pre-downturn period (further information on compound average growth can be found in background note 11).

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 information service activities 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, the information service activities industry did not begin its decline until Quarter 3 (July to Sept) 2008, and its output decreased by 17.9% between Quarter 2 (Apr to June) 2008 and the industry’s trough in Quarter 3 (July to Sept) 2009.

Information service activities and the services industries as a whole recovered strongly following their respective periods of contraction. Services grew steadily at a compound average growth rate of 0.6% per quarter (between Quarter 2 (Apr to June) 2009 and Quarter 3 (July to Sept) 2015), surpassing its pre-downturn peak in Quarter 1 (Jan to Mar) 2012. Information service activities grew relatively faster despite some volatility, at a compound average growth rate of 1.7% per quarter (between Quarter 3 (July to Sept) 2009 and Quarter 3 (July to Sept) 2015), surpassing its Quarter 2 (Apr to June) 2008 level by Quarter 4 (Oct to Dec) 2012. By Quarter 3 (July to Sept) 2015, the services industries as a whole was 10.8% above its value in Quarter 1 (Jan to Mar) 2008, while information service activities was 22.2% above its value in Quarter 2 (Apr to June) 2008.

Information service activity products are used in the production processes (as intermediate consumption) of a range of industries, totalling £7.6 billion in 2013 and representing 0.5% of total intermediate consumption in this year. In 2013, around 14.5% of the intermediate consumption of this industry’s products can be attributed to 5 industries (creative, art and entertainment activities, information service activities, security and investigation activities, advertising and market research, and repair of computers and personal and household goods). Between 1997 and 2013, creative, arts and entertainment activities consistently used the highest amount of information service activities as a share of its total intermediate consumption, even though this share decreased by 6.1 percentage points between 1997 and 2013 (from 21.9% in 1997 to 15.8% in 2013) (Input-Output Supply and Use tables, 2015 edition).