Index of Services, UK: September 2015

• The Index of Services is estimated to have increased by 2.7% in September 2015 compared with September 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 0.4% between August 2015 and September 2015, following flat growth between July 2015 and August 2015.
• The Index of Services increased by 0.7% in Quarter 3 (July to Sep) 2015 compared with Quarter 2 (Apr to June) 2015. This figure was unrevised from the estimate used in the Gross Domestic Product (GDP) Preliminary Estimate, published on 27 October 2015. This figure is consistent with the Second Estimate of GDP, published on 27 November 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 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.

As seen in Figure 1, the IoS increased by 2.7% in September 2015 compared with September 2014. In order of their contribution to growth (listed in reference table IOS1):

1. business services and finance increased by 3.1%

2. distribution, hotels and restaurants increased by 4.6%

3. transport, storage and communication increased by 4.2%

4. government and other services increased by 0.4%

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

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. business services and finance increased by 0.7%

2. distribution, hotels and restaurants increased by 0.9%

3. government and other services increased by 0.1%

In contrast, transport, storage and communication decreased by 0.2%.

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

Total services grew by 2.7% between Quarter 3 (July to Sep) 2014 and Quarter 3 (July to Sep) 2015 and by 0.7% between Quarter 2 (Apr to June) 2015 and Quarter 3 (July to Sep) 2015. This is compared with growth rates of 2.3% and 0.5% 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 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 Second Estimate of GDP, 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 grew from 73% to 79% between 1997 and 2014 (Labour Market Statistics, November 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 Second Estimate of GDP, 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 (further information on compound average growth can be found in background note 11). 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 communication recovered very strongly following the economy’s downturn and in Quarter 3 (July to Sep) 2015, they were 15.0% and 11.3 % 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 Sep) 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 Sep) 2015, output was 6.6% 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.

Distribution, hotels and restaurants

The index of distribution, hotels and restaurants increased by 4.6% in September 2015 compared with September 2014, following an increase of 4.1% in August 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 6.1%. Information published in the Retail Sales - September 2015 release indicated that some of the growth seen in this period can be attributed to promotions centred around the Rugby World Cup 2015 (although there is no evidence to suggest that this event had any noticeable impact on other services industries). Wholesale and retail trade and repair of motor vehicles and motorcycles, which increased by 8.3%, also made a large contribution to the increase in distribution, hotels and restaurants.

Transport, storage and communication

The index of transport, storage and communication increased by 4.2% in September 2015 compared with September 2014; this is following an increase of 4.6% in August 2015 compared with the same month a year earlier. The main contributors to the increase were: publishing, audiovisual and broadcasting activities, which increased by 13.4% and computer programming, consultancy and related activities, which increased by 5.0%.

Business services and finance

The index of business services and finance increased by 3.1% in September 2015 compared with September 2014; this is following an increase of 3.3% in August 2015 compared with the same month a year earlier. The main contributors to the increase were: other professional service activities, which increased by 5.6%, administrative and support services activities, which increased by 5.5% and real estate activities, which increased by 1.7%.

Government and other services

The index of government and other services increased by 0.4% in September 2015 compared with September 2014; this is following an increase of 0.2% in August 2015 compared with the same month a year earlier. The main contributors to the increase were: human health and social work activities, which increased by 1.7% and arts, entertainment and recreation, which increased by 3.4%.

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 while the growth rate for August 2015 compared with August 2014 (2.7%) was revised down by 0.1%.The month-on-month growth rate for July 2015 compared with June 2015 (0.1%) was revised down by 0.1%, while the growth rate for August 2015 compared with July 2015 (0.0%) was unrevised.

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), publishing activities (industry 58) includes the publishing of books, brochures, leaflets, dictionaries, encyclopaedias, atlases, maps and charts; publishing of newspapers, journals and periodicals; directory and mailing list and other publishing, as well as software publishing. Moreover, publishing involves the acquisition of copyrights to content (information products) and making this content available to the general public by engaging in (or arranging for) the reproduction and distribution of this content in various forms. The industry also includes all feasible forms of publishing (in print, electronic or audio form, on the internet, as multimedia products such as CD-ROM reference books etc.), except for the publishing of motion pictures.

In 2014, publishing activities generated £10.7 billion of output gross value added (GVA), which represented 10.7% of the GVA in the information and communication section (section J). The share of total output attributed to this industry decreased between 1997 and 2014 from 1.2% to 0.7%, suggesting that the industry grew slower than the rest of the economy (Second Estimate of GDP, Quarter 3 (July to Sep) 2015).

In the period from 1997 to 2015, publishing activities 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 followed a broadly upward trend growing at a compound average rate of 0.2% per quarter, while services experienced faster and steadier growth (a compound average rate of 0.9% per quarter) over the same period (further information on compound average growth can be found in background note 11). 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%. Publishing activities also contracted during the economy’s downturn with the industry’s output decreasing until Quarter 1 (Jan to Mar) 2010 when it was 16.3% below its Quarter 1 (Jan to Mar) 2008 value.

Following their respective periods of contraction, the paths of publishing activities and the services industries as a whole significantly differed. Services returned to strong and consistent growth, surpassing its pre-downturn peak in Quarter 1 (Jan to Mar) 2012. In contrast, publishing activities never recovered to its Quarter 1 (Jan to Mar) 2008 level, and after being relatively flat between 2009 and 2013 it started to decline again. By Quarter 3 (July to Sep) 2015, the services industries as a whole was 11.1% above its value in Quarter 1 (Jan to Mar) 2008, while publishing activities was 23.0% below its value in Quarter 1 (Jan to Mar) 2008.

Household final consumption expenditure by COICOP group in constant prices is shown in Figure 7. The chart shows that between Quarter 1 (Jan to Mar) 1997 and Quarter 2 (Apr to June) 2015 household expenditure on classes 9.5.1, 9.5.2 and 9.5.3 followed different trends and converged near the end of the period. The household final consumption expenditure on books followed a broadly upward trend between Quarter 1 (Jan to Mar) 1997 and Quarter 1 (Jan to Mar) 2007, increasing by 62.3%. This trend was reversed in Quarter 2 (Apr to June) 2007 and by Quarter 2 (Apr to June) 2015 the spending on books fell by 30.8%, when compared with Quarter 1 (Jan to Mar) 2007. However, the decline in spending on this class was slower than the rise seen at the beginning of the period so in Quarter 2 (Apr to June) 2015 spending was 12.3% above its Quarter 1 (Jan to Mar) 1997 level (Consumer Trends, Quarter 2 (Apr to June) 2015). This suggests that the falling demand for books since Quarter 2 (Apr to June) 2007 may have had some contribution to the decrease seen on Figure 6.

Figure 7 shows that household expenditure on miscellaneous printing matter (including advertising materials, posters, greeting cards, maps, etc.) followed a volatile but broadly upward trend between Quarter 1 (Jan to Mar) 1997 and Quarter 2 (Apr to June) 2015, increasing by 23.2% (Consumer Trends, Quarter 2 (Apr to June) 2015). However, this class has consistently seen the smallest amount of household expenditure among the 3 COICOP classes, suggesting that the growth in demand for the materials in this class may have had a limited offsetting impact on the decline seen in publishing activities.

Figure 7 also shows that the spending on newspapers between Quarter 1 (Jan to Mar) 1997 and Quarter 2 (Apr to June) 2015 has more than halved, from around £1.8 billion at the beginning of the period to around £840 million at the end of the period (Consumer Trends, Quarter 2 (Apr to June) 2015). As newspapers are the largest commodity within the 3 classes discussed, this decrease in demand (52.3%) may explain why publishing activities have followed a broadly downward trend over the period.

The implied deflators of newspapers, books and miscellaneous printed matter show that prices of these 3 classes followed an upward trend between Quarter 1 (Jan to Mar) 1997 and Quarter 2 (Apr to June) 2015 (further information on implied deflators can be found in background note 11). The price of newspapers more than doubled over this period while books and miscellaneous printed matter saw smaller increases at 49.0% and 33.2%, respectively (Consumer Trends, Quarter 2 (Apr to June) 2015).